Fundamentals of Financial Accounting

CIMA Certificate Level

1st Mock Exam Conducted By MIIT

INSTRUCTIONS TO CANDIDATES
Read the instructions before you look at the questions

1. Financial statements are prepared:

Only for publicly owned business organizations.

A)
For corporations, but not for sole proprietorships
or partnerships.
B)
Primarily for the benefit of persons outside of the
business organization.
C)
In either monetary or nonmonetary terms,
depending upon the need of the decision maker.
D)

2. The basic purpose of an accounting system is to:

Develop financial statements in conformity with
generally accepted accounting principles.
A)
Provide as much useful information to decision
makers as possible, regardless of cost.
B)
Record changes in the financial position of an
organization by applying the concepts of double-
C) entry accounting.
Meet an organization's need for accounting
information as efficiently as possible.
D)
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3. Information is cost effective when:
The information aids management in controlling
costs.
A)
The information is based upon historical costs,
rather than upon estimated market values.
B)
The value of the information exceeds the cost of
producing it.
C)
The information is generated by a computer-
based accounting system.
D)
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4. Although accounting information is used by a wide

variety of external parties, financial reporting is primarily
directed toward the information needs of:

Investors and creditors..

A)
Government agencies such as the Internal
Revenue Service.
B)

Customers.
C)

Trade associations and labor unions.

D)
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5. A complete set of financial statements for Hartman

Company, at December 31, 1999, would include each of
the following, except:

ABalance sheet as of December 31, 1999.

)

Income statement for the year ended

December 31, 1999.
B)
 CStatement of projected cash flows for 2000.
)

Notes containing additional information that is

Duseful in interpreting the financial statements.
)

6. All of the following are characteristics of managerial

accounting, except:

a. Reports are used primarily by insiders rather than

by persons outside of the business entity
b. Its purpose is to assist managers in planning and
controlling business operations
c. Information must be developed in conformity with
generally accepted accounting principles or with
income tax regulations.
d. Information may be tailored to assist in specific
managerial decisions.

7. In comparison with a financial statement prepared in

conformity with generally accepted accounting principles,
a managerial accounting report is more likely to:

a. Be used by decision makers outside of the business

organization
b. Focus upon the operation results of the most recently
completed accounting period.
c. View the entire organization as the reporting entity.
d. Be tailored to the specific needs of an individual
decision maker.

8. The nature of an asset is best described as:

a. Something with physical form that is valued at cost in
the accounting records.
b. An economic resource owned by a business and
expected to benefit future operations
c. An economic resource representing cash or the right to
receive cash in the near future.
d. Something owned by a business that has a ready
market value.

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9. The balance sheet item that represents the resources

invested by the owner is:

a. Accounts receivable.
b. Cash
c. Note payable.
d. Owner's equity
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The balance sheet of Bock Designs includes the following

items:
Accounts Receivable Cach
Diane Bock, Capital Accounts Payable
Equipment Supplies
Notes Payable Notes Receivable
10. This list includes:
A. Accounts Receivable Cash
B. Diane Bock, Capital Accounts Payable
C. Equipment Supplies
D. Notes Payable Notes Receivable

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11. Arguments that the cost principle is not a satisfactory

basis for the valuation of assets in financial statements are
usually based on:
A. The lack of objective evidence to permit
verification of cost data.
B. Increased availability and capacity of computers
C. Stronger internal control structures.
D. Continued inflation.
.

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12. The amount of owner's equity in a business is not

affected by:
A.The percentage of total assets held in cash.
B.Investments made in the business by the owner.
C.The profitability of the business.
D.The amount of dividends paid to stockholders.
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13. An income statement communicates information

regarding revenues and expenses:
A.For a period of time.
B.At a given point in time.
C.For some point of time in the future.
D.At the beginning of the fiscal year.

14. Which one of the following users of accounting

information is not considered to be an external user of
accounting information rather than an internal user of
accounting information?

Sales
A)staff.

Comp
any
B)mana
gers.
Comp
any
C)custo
mers.
Offic
ers
D)and
direct
ors.
Budg
et
E)office
rs.

15. A CPA owns a large home and she has divided the second floor into two separate units:
one used as her personal residence and the other rented out to local college students as an
apartment. On the first floor, she has her own CPA firm where she meets with and provides
accounting services to clients. If she wishes to keep separate records for each of these three
activities, the accounting principle to which she is adhering is?
Going-concern principle.
A)
Monetary unit principle.
B)
Cost principle.
C)
Business entity principle.
D)
Conservatism principle.
E)

16. The basic accounting equation is Assets = Liabilities + Equity. The Equity term of the
equation can be further broken down into several other terms. Assume that the entity is a
sole proprietorship. Which of the following statements is correct?
 Additional investments by the business owner will increase
A) equity; and revenues will decrease equity.
Additional investments by the business owner will decrease
B) equity; and revenues will increase equity.
Increases in expenses will decrease equity; and owner
C) withdrawals will decrease equity.
Revenues will increase equity; and owner withdrawals will
D) increase equity.
Revenues will decrease equity; and owner withdrawals will
E) increase equity.

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17. If at the end of the accounting period the company's liabilities total $19,000 and its
equity totals $40,000, then what must be the total of assets?
$14,000
A)
$40,000
B)
$21,000
C)
$59,000
D)
None of the above
E)

18. Company assets total $150,000 and its liabilities total $30,000. What is the equity of
this company?
$120,000
A)
$100,000
B)
$150,000
C)
$180,000
D)
None of the above
E)
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19. If during the current accounting period the company's assets increased by $24,000 and
equity increased by $5,000, then how did liabilities change?
Increased by $29,000
A)
Increased by $24,000
B)
Decreased by $5,000
C)
Decreased by $19,000
D)
Increased by $19,000
E)

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20. Assume that a company's beginning owner's capital was $20,000. During the period,
withdrawals were $24,000, and the owner made additional investments during the period of
$50,000. The ending capital balance was $90,000. What was the net income or net loss for
the period?
Net income, $56,000
A)
Net loss, $44,000
B)
Net income, $44,000
C)
Net income, $30,000
D)
None of the above
E)

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21. Company assets total $150,000 and its liabilities total $30,000. What is
the equity of this company?
$120,000
A)
 $100,000
B)
$150,000
C)
$180,000
D)
None of the above
E)

22. If during the current accounting period the company's assets increased by $24,000 and
equity increased by $5,000, then how did liabilities change?
Increased by $29,000
A)
Increased by $24,000
B)
Decreased by $5,000
C)
Decreased by $19,000
D)
Increased by $19,000
E)

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22. Assume that a company's beginning owner's capital was $20,000. During the period,
withdrawals were $24,000, and the owner made additional investments during the period of
$50,000. The ending capital balance was $90,000. What was the net income or net loss for
the period?
Net income, $56,000
A)
Net loss, $44,000
B)
Net income, $44,000
C)
Net income, $30,000
D)
None of the above
E)
23. If during the accounting period
the company's assets decreased by
$15,000, and equity increased by
$4,000, then by how much did
liabilities change?
Increased by $12,000
A)
Increased by $8,000
B)
Decreased by $12,000
C)
Decreased by $19,000
D)
Decreased by $6,000
E)

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24. Which of the following

financial statements refers to a
specific date (point in time)?
Income statement
A)
Statement of owner's
B) equity
Statement of cash
C) flows
Balance Sheet
D)
Answers A, B & C are
E) all correct

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25. Total assets and total liabilities

of a company are reported on
which of the following?
Income statement
A)
 Balance sheet
B)
Statement of cash
C) flows
Statement of owner's
D) equity
None of the above
E)

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26. A statement of cash flows will report cash flows from which of the
following activities?
Operating activities
A)
Financing activities
B)
Investing activities
C)
All of the above
D)
Only A and C are correct
E)

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27. When cash is received from a customer in payment of an account

receivable, how are the elements of the accounting equation affected?
Decrease assets (cash) and increase assets (accounts
A) receivable)
Increase assets (cash) and decrease assets (accounts
B) receivable)
Increase assets and increase liabilities
C)
Increase assets and increase equity
D)
None of the above
E)

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 28. The owner's investment of cash in the company will result in which of the
following?
An increase in cash and a decrease in equity
A)
An increase in cash and an increase in equity
B)
A decrease in cash and a decrease in liabilities
C)
An increase in fees earned and an increase in equity
D)
An increase in cash and an increase in liabilities
E)

29. Purchasing equipment on account (payment to be made in the future) will have what effect on
the components of the accounting equation?

Increase in equipment (assets) and a decrease in equity

A)

Increase in equipment (assets) and an increase in equity

B)

Increase in equipment (assets) and an increase in liabilities

C)

Increase in equipment (assets) and a decrease in liabilities

D)

None of the above

E)

30. A proprietorship employs one full-time accountant. This person is considered an employee. On
the desk in front of her are five different business documents. Which one of the following would not
be considered an original source document from the proprietorship's point of view?

A bank receipt for $10,000 evidencing yesterday's cash receipts

A) deposited in the bank.
 The original copy of the insurance policy taken out by the
B) proprietorship to insure the vehicle it purchased during its first month of
operations. The annual insurance premium of $500 was printed within
the contract.
The invoice received by the proprietorship from Samsung Electronics
C) when the proprietorship purchased its first lot of inventory to be sold to
its customers.
A cancelled check for $500 representing payment in full for the annual
D) insurance premium mentioned in item B above.
A copy of the Balance Sheet at the end of the company's first year of
E) existence.

31. At any given point in time, it is possible to describe general ledger accounts as having an
expected or "normal" balance: either a debit balance or a credit balance. This normal balance is on
the side of the account, that is, the debit side or credit side, that represents the "increase" side of the
account. In order, what is the normal balance for the Equipment account, the Owner's Equity
account, and the Sales Revenue account?

debit, credit, credit

A)

B)debit, debit, debit

credit, debit, credit

C)

credit, credit, debit

D)

E)debit, debit, credit

32. The Baker sole proprietorship started operations on January 1, 2009 and uses a calendar-year
accounting period. On February 7, 2009, the company purchases an automobile with an invoice cost
of $10,000. To settle this transaction, the company immediately pays $3,000 cash to the automobile
dealership and signs a three-month note payable for the $7,000 purchase price balance. A partial
general journal entry is given below. Which item accurately describes the partial entry from Baker's
viewpoint
 Cash is debited for $3,000 and Notes Payable is credited for $7,000
A)
The asset account Vehicles is debited for $7,000 and Cash is credited for
B) $3,000.
The asset account Vehicles is credited for $10,000 and Cash is credited for
C) $3,000
Cash is credited for $3,000 and Notes Payable is credited for $7,000
D)
Notes Payable is credited for $7,000 and the asset Vehicles is credited for
E) $3,000

33. A company buys a one-year insurance policy on February 1, 2009, and immediately pays in cash
the $720 insurance premium. The company's bookkeeper records the transaction by crediting the
Cash account for $720 but debits Insurance Expense for $720, instead of debiting Prepaid Insurance,
which would be the correct entry. Based on this information, which statement concerning the trial
balance is correct if the company fails to correct this bookkeeping error?

The trial balance is correct as it is.

A)
The total debits of the trial balance do not equal the total credits of the trial
B) balance.
The total debits on the trial balance are higher than the total credits.
C)
The total credits on the trial balance are lower than the total debits.
D)
The total trial balance debits equal the trial balance credits but one or more
E) account balances are incorrect.

34. A company buys a new car on February 15, 2009, and immediately pays in cash the $25,000
purchase price. The company's bookkeeper fails to record the transaction at all. Based on this
information, which statement concerning the trial balance is correct if the company fails to correct
this bookkeeping error?

The trial balance is correct as it is.

A)

The total debits of the trial balance do not equal the total credits of the trial balance.
B)
 The total debits on the trial balance are higher than the total credits.
C)
The total debits on the trial balance are equal to the total credits on the trial balance, but one or
more accounts have incorrect balances.
D)
The total trial balance debits equal the trial balance credits, but only one account balance is
incorrect.
E)

35. Amelia Company received its telephone bill on February 15, 2009 in the amount of $325. This
bill covered the period from January 1, 2009 through January 31, 2009. Amelia paid this bill
immediately. The company uses a calendar year accounting period and prepares its financial
statements only once a year at the end of the year. The general journal entry to record this transaction
includes:

A debit to the Cash account for $325.

A)

A credit to the Telephone Expense account for $325.

B)

A debit to the Telephone Expense account for $325.

C)

A credit to Accounts Payable for $325.

D)

A debit to Accounts Payable for $325.

E)

36. On March 1, 2009, a company collects a $500 deposit from a customer for the
installation of a home-theater system. The installation is scheduled for May 5, 2009.
How should the company record this entry on March 1, 2009?

The Cash account is credited for $500.

A)

The Sales Revenue account is credited for $500.

B)
 The Unearned Sales Revenue account is credited for $500.
C)

The Unearned Sales Revenue account is debited for $500.

D)

None of the above are correct.

E)

37. A company which sells and services medical insurance policies received one payment of $14,000
cash from a customer for insurance coverage for the next two years. Recording the receipt of this
cash when it is received will require which of the following?

Withdrawals to be debited, an asset to be credited

A)

A liability to be debited, an asset to be credited

B)

An asset to be debited, capital to be credited

C)

An asset to be debited, a liability to be credited

D)

One asset to be debited, another asset to be credited

E)

38. Olivia, the proprietor, deposited $40,000 in the company's bank account. She received the money
as the result of a settlement of a class action lawsuit and decided to invest it in her business to help
with expansion. Recording the transaction on the company books will require which of the
following?

An asset to be debited, a liability to be credited

A)
A liability to be debited, an asset to be credited
B)
An asset to be debited, capital to be credited
C)
Withdrawals to be debited, an asset to be credited
D)
 One asset to be debited, another asset to be credited
E)

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39. Which of the following statements is true?

Revenue accounts are increased by debit entries.

A)

Journalizing entries occurs after posting entries.

B)

Debit entries are entries involving the right-hand side on an account.

C)

An account shows increases and decreases and an account balance.

D)

Journalizing errors should be erased and a correct entry made.

E)

40. The personal residence of Samuel Leonard was landscaped with all new trees, shrubs and
flowers. This improvement was paid for with a check written against Samuel's business checking
account. The landscaping provides no benefit to Samuel's business. What account should be debited
for this transaction?

Samuel Leonard, Capital

A)
Samuel Leonard, Withdrawals
B)
Landscaping Improvements
C)
Landscaping Expense
D)
None of the above
E)
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41. One of your company's business checks clears the bank at its correct amount of $500. The
transaction that underlies this check was the cash purchase of office supplies. The entry was recorded
as a debit to Insurance Expense for $50 and a credit to Cash for $50. The correcting entry should
include which of the following?

A debit to Accounts Receivable for $450

A)
A credit to Supplies Expense for $500
B)
A credit to Cash for $50
C)
A credit to Cash for $450
D)
A credit to Cash for $540
E)

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42. Which of the following best describes accounting?

a. Can be thought of as the "language of business."

b. Is of limited or little use to individuals outside of the business.

c. Records economic data but does not communicate the data to users.
Relies upon concepts and principles that are independent of
d. specific user needs.

43. Which of the following errors will cause the trial balance totals to be UNEQUAL?

a. Failure to record a transaction or post a transaction.

b. Recording the same erroneous amount for both the debit and the credit parts of a transaction.
 c. Posting a part of a transaction correctly as a debit or credit but to the wrong account.
Posting the debit amount of the transaction correctly and posting the credit amount of the
d. transaction incorrectly.

44. The ________ is prepared to determine if debits are equal to credits and can ultimately be used to
discover some errors.

a. balance sheet

b. trial balance

c. income statement

d. statement of cash flows

45. A credit may represent a(n):

a. increase in asset accounts.

b. increase in liability accounts.

c. decrease in the capital account.

d. increase in expense accounts.

46. Decreases in owner's equity from using up assets or consuming services attributable to business
activities are called:

a. drawings.

b. revenues.

c. expenses.

d. liabilities.
47. Every transaction affects at least two accounts. The purchase of land in exchange for cash is
recorded with which of the following entries?

a. Debit to Cash, and a credit to Land.

b. Debit to Owner's Equity, and a credit to Cash.

c. Debit to Land, and a credit to Cash.

d. Debit to Land, and a credit to Accounts Payable.

48. Websavvy paid the electric and gas bill for the month in the amount of $325.00. What is the
entry to record this transaction?

a. Debit Cash for $325.00, credit Utilities Expense for $325.00.

b. Debit Utilities Expense for $325.00, credit Cash for $325.00.

c. Debit Accounts Receivable for $325.00, credit Utilities Expense for $325.00.

d. Debit Utilities Expense for $325.00, debit Accounts Receivable for $325.00.

49. If Websavvy (an imaginary web design organization) purchased an insurance policy for the
automobile that is used in the business, and the policy was for 24 months and the cost was $4,800,
the entry to record this purchase is:

a.

b.

c.
 d.

50. The rules of debit and credit and the normal balances of the various types of accounts are
summarized correctly in which of these charts?

a.

b.

c.
d.