PART I.

True/False Questions

INSTRUCTION:
INSTRUCTION: Write: “True” if the statement is correct and write “False” if the statement is
wrong on the space provided against each question

__________1. When pricing inventories using the First-in, First-out (FIFO) method the costs of
the first items acquired should be assigned to the first items sold.
__________2. During periods of rising prices, the LIFO method will show the lowest net
income; FIFO the highest; and the average cost, in between.
__________3. The Gross Profit method can be used in place of the retail method when records of
the retail prices of beginning inventory and purchases are not kept.
__________4. Long-term assets are assets that are intended for resale, and have a useful life of
more than one year.
__________5. For financial reporting purposes, neither gains nor losses are recognized in the
exchange of similar assets.
__________6. In preparing a payroll sheet, non-taxable income has no effect on the total income
tax paid to the government unit.
__________7. The concept of objectivity, consistency, disclosure, and materiality are more
important than conservatism, and the later would be a factor only when the others
do not play a significant role.
__________8. In liquidation of a partnership, after all liabilities have been paid the remaining
cash is distributed to the partners, based on their income sharing ratio.
__________9. Retained Earnings represent a pool of funds that is going to be distributed to the
shareholders.
__________10. The carrying value under the straight-line method is greater than that under the
double declining balance method in all years except at the end of the economic
life of the asset.
PART II. Multiple Choice Questions

INSTRUCTION:
INSTRUCTION: Choose the best answer from the given alternatives and write the letter of your
choice in block letter on the space provided.

________1. Which of the following is regarded as the primary objective of accounting for
inventories?
1. The determination of the inventory value
2. The determination of income through the matching of costs and revenues
3. The proper determination of the physical flow of goods
4. The measurement of inventory turnover
5. None of the above

________2. Identify the correct statement

6. Under the perpetual inventory system the cost of goods sold is accumulated as sales are
made and costs are transferred from the Inventory account to Cost of Goods Sold.
7. If the value of ending inventory is understated or overstated, a corresponding error will
be made in net income
8. Under the retail inventory method, inventory is determined at retail prices and is then
reduced to estimated cost by applying a ratio of cost to retail price
9. All of the above
10. None of the above

________3. The category of long-term asset does not include which of the following item(s)
11. Land
12. Natural resources
13. Patents
14. All of the above
15. None of the above

________4.Which of the following facts can be considered as one of the reasons to the
development of accounting concepts and principles.
16. The development of business firms in size and form
17. The complexity of financial transactions
 18. The need to compromise conflict of interest between managers and owners
19. All of the above
20. A and C

________5. BATU Trading Co. has outstanding stock composed of 10, 000 shares of Birr 10,
cumulative, preferred stock of Birr 100 Par; and 50, 000 outstanding shares of Birr
25 par common stock; paid-in-capital in excess of par – common stock of Birr 250,
000 and retained earnings of Birr 750, 000. If preferred dividends are three years in
arrears plus Birr 110 per share in the event of liquidation, what is the total
liquidation value of the preferred stock?
21. Birr 1, 300, 000
22. Birr 1, 500, 000
23. Birr 1, 100, 000
24. Birr 1, 400, 000
25. None of the above

PART III. Workout Questions

INSTRUCTION:
INSTRUCTION: Attempt the following exercises and show all the requirements clearly

1. Tahesas 11 Hospital purchased a special X-ray machine for its operating room. The
machine, which cost Birr 311, 560, was expected to last ten years, with an estimated
residual value of Birr 31, 560. After two years of operation (and depreciation charges using
the straight line rate), it became evident that the X-ray machine would last a total of only
six years. The estimated residual value, however, would remain the same. Given this
information, determine:

(a) the depreciation expense of the first and the second years.
(b) The new depreciation charge (expense) for the third year on the basis of the
revised estimated useful life.
2. Condensed Income Statements for H & H Company for two years are shown below:
 19x4 19x3
Sales……………………………Br. 230, 000 Br. 206, 000
Cost of Goods Sold……………….. 95, 000 107, 000
Gross Profit (margin)……………... 135, 000 99, 000
Operating Expenses…………………67,
Expenses…………………67, 000 43, 000
Net Income………………………….68,
Income………………………….68, 000 56, 000

After the end of 19x4 it was discovered that an error had resulted in a Birr 15,000 understatement
of the 19x3 ending inventory.

Compute the corrected net income for 19x3 and 19x4.

19x4. What effect will the error have on net
income and owner’s equity for 19x5?
19x5?