CHAPTER TWO

PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING OF

GOVERNMENTAL ENTITIES

2.1 ACTIVITIES OF GOVERNMENT

Government may involve in three types of activities:
Governmental Activities:
 Consistent with the availability of resources to provide those services.
 Most general purpose governments provide certain core services:
 Those related to protection of life and property (e.g., police and fire protection),
 public works (e.g., streets and highways, bridges, and public buildings),
 Parks and recreation facilities and programs, and cultural and social services.
 Governments must also incur costs for general administrative support such as data
processing, finance, and personnel.
 Comprise the major part of what GASB Concepts Statement No. 1 refers to as
governmental-type activities.
Business-Type Activities:
Governments also engage in business-type activities. These activities include, among others,
public utilities (e.g., electric, water, gas, and sewer utilities), transportation systems, toll roads,
toll bridges, hospitals, parking garages and lots, liquor stores, golf courses, and swimming pools.
Many of these activities are intended to be self-supporting by charging users for the service they
receive. Operating subsidies from general tax revenues are not uncommon, however, particularly
for transportation systems.
Fiduciary Activities:
Governments often act in a fiduciary capacity, either as an agent or trustee, for parties outside the
government. For example, a government may serve as agent for other governments in
administering and collecting taxes. Governments may also serve as trustee for investments of
other governments in the government`s investment pool, for escheat properties that revert to the
government when there are no legal claimants or hears to a deceased individuals estate, and for
assets being held for employee pension plans, among other trustee roles.
Under GASBS 34, only private-purpose agency and trust relationships - those that benefit
individuals, private organizations, and other governments - are reported as fiduciary activities.
Public-purpose agency and trust activities, those that primarily benefit the general public and the
government‘s own programs, are treated as governmental activities for accounting and financial
reporting purposes.
2.2. OVERVIEW OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT
(CAFR)
State and local governments are encouraged to prepare a comprehensive Annual financial report
(CAFR).
The comprehensive annual finical report (CAFR includes three major sections):
 Introductory  Financial and  Statistical.
The CAFR is to include blended component units and discretely presented component units. In
addition, the CAFR includes an introductory section,-management‘s discussion and analysis
(MD&A), the basic financial statements, required supplementary information (RSI), combining
and individual statements, schedules, and a statistical section. An outline of the CARF follows:
1. Introductory section
 Table of contents
 Letter of transmittal
 List of principal officials
 Organization chart
2. Financial section
 Auditor‘s report
 Management‘s discussion and analysis
 Basic financial statements
 Government-wide statements
1. Statement of net assets
2. Statement of activities
 Fund financial statement
1. Governmental funds
 Balance sheet
 Statement of revenues, expenditure, and change in fund balances.
2. Proprietary fund
 Statements of fund net assets (or balance sheet)
 Statements of revenues, Expense and change in fund net assets
 Statement of cash flows
3. Fiduciary funds (and component units that are fiduciary in nature)
 Statement of fiduciary net assets
 Statement of changes in fiduciary net assets
 Notes to the financial statements
 Required supplementary information other than Management Discussion &
Analysis (MD & A)
 Schedule of funding progress of pension plans
 Schedule of employer contributions of pension plans
 Budgetary comparison schedules for the general and major special revenue funds (may be
includes as a basic financial statements)
 Information about infrastructure assets using the modified approach (if applicable)
 Schedules required for external risk financing pools (if applicable)
 Combining statements for non-major funds and individual funds and schedules
3. Statistical section
2.3.BASIC FINANCIAL STATEMENTS Government –Wide Financial Statements
Statement 34 requires governments to prepare government –wide financial statements using the
economic resources measurement focus and full accrual basis of accounting. The statements are:
1. Statement of net assets and
2. Statements of activities.
Statements of net assets; assets are generally reported in order of liquidity. Capital assets are
reported net of depreciation. A classified approach may also be used, separating current and non-
current assets. Non-current liabilities are reported separately. Net assets are reported in three
categories:
 Invested in capital assets, net of related debt;
 Restricted; and
 Unrestricted.
Invested in capital assets, net of related debt is computed by taking the capital (fixed) assets
less accumulated depreciation, less the debt outstanding that is related to capital assets. The
deduction does not include other long-term debt, not related to the acquisition of capital assets.
This equity amount may or may not be directly computed from the face of the statements of net
assets.
The term restricted is defined by GASB as "(a) externally imposed by creditors (such as through
debt covenants), grantors, contributors, or laws or regulation of other governments, and (b)
imposed by law through constitutional provisions or enabling legislation.‖ According to
statements 34,"enabling legislation, as the term is used in this statement, authorizes the
government to assess, levy, charge, or otherwise mandate payment of resources (from external
resource providers) and includes a legally enforceable requirement that those resources be used
only for the specific purposes stipulated in the legislation.
Unrestricted net assets is a" plug" figure, determined by deducting the other two categories
(invested in capital assets, net of related debt and restricted) from the total net assets. GASB
concluded that "designation" of net assets (by management if the government) should not be
reported on the statement of net assets.
Statement of activities; Expenses, computed on the full accrual basis, are reported on a
functional basis (public safety, general government, etc.). Revenues that can be directly
associated with those functions are deducted, and a net expense or revenue is reflected to the
right. These functions are classified as governmental activities, business-type activities, and
component units. Then general revenues are deducted from the net expenses (revenues). Special
and extraordinary items are shown after the general revenues, as are transfers. The change in net
assets is then reflected, after which the net assets for the beginning and end of the period are
shown.
Fund Financial Statements
1. In addition to government wide statements, GASB requires fund financial statements.
These are presented separately for governmental, proprietary, and fiduciary funds.
Governmental funds - balance sheet
Governmental funds - statement of revenues, expenditures, and changes in fund balances.
This statement is prepared using the current financial resources measurement focus and
modified accrual basis of accounting. Revenues are reported by sources and expenditures are
reported by character (current, debt service, capital out lay) and by function (general
government, public safety, etc).
Proprietary funds
Statements of net assets, or balance sheet
Net assets are broken down in the same manner as in the government - wide statements:
1. Invested in capital assets, net of related debt,
2. Restricted, and
3. Unrestricted.
Proprietary funds - statement of revenues, expenses, and changes in fund net assets;
operating revenues and expenses must be reported first, followed by an operating income figure.
Next, non-operating revenues and expenses are reported followed by income (loss) before
contributions are transfers. Note that depreciation is shown separately as an operating expense;
interest expense is shown separately in the non-operating category. The next section includes
capital contributions, additions to permanent and term endowments, special and extraordinary
items, and transfers .The economic resources measurement focus and accrual basis of accounting
are used for this statement.
Proprietary funds - statements of cash flows Fiduciary funds
Statement of fiduciary net assets and statements of changes in fiduciary net assets; GASB
requires that these statements be included for all trust and agency fund types and for components
units that are similar in nature. GASB also requires, if separate GAAP basis financial reports are
not issued for individual pension and other employee benefit plans, that those reports be reflected
in the notes to the basic financial statements. If separate statements have been issued, the notes
should indicate how they might be obtained. Note that agency funds are included in the
statement of net assets and not in the statement of changes in net assets because agency
funds report only assets and liabilities.
2.3.NOTES TO THE FINANCIAL STATEMENTS
GASB recently issued statements 38, revising the required note disclosures. Statement 38
indicates that the notes must distinguish between the primary governments and discretely
presented component units.
2.4.Required Supplementary Information Other Than MD&A
GASB requires a schedule of funding progress and a schedule of employer contributions as
required supplementary information (RSI) when pension plans are reported. GASB statement 34
requires RSI for two major areas:
1. Budgetary comparison schedules and
2. Information about infrastructure assets reporting using the modified approach, if applicable.
2.5.PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE
AND LOCAL GOVERNMENT
2.5.1.INTRODUCTION
Governments must comply with the many and varied legal and contractual requirements,
regulation, restrictions and agreements that affect their financial management and accounting;
and such compliance must be demonstrable and reported upon regularly. Governments should
also prepare financial statement in conformity with Generally Accepted Accounting Principles
(GAAP), which provide uniform minimum national standards of and guidelines to financial
reporting.
The GASB‘s codification of governmental accounting and financial reporting standard presents
12 principles of governmental accounting and financial reporting. It is necessary to
understand the statement of each principle and its explanation to read the financial reports of
state and local governments intelligently.
2.6.SUMMARY STATEMENT OF PRINCIPLES
The following overview of these principles, including those changed or added by statement no,
34 should afford an understanding of the unique nature and complexity of governmental
accounting and financial reporting.
 PRINCIPLE ONE
Accounting and Reporting Capabilities
A governmental accounting system must make it possible both
A- To present fairly and with full disclose the financial position and results of financial
operations of the funds and account groups of the governmental units in conformity with
Generally Accepted Accounting Principles; and
B- To determine and demonstrate compliance with finance related legal and contractual
provisions.
Sometimes the legal requirement might be in contrary to GAAP, for instance governmental
entities may require keeping books with a single entry, or it may require keeping all account on a
cash basis. In those cases, financial statement and reports prepared in accordance with the entity
laws are considered as ―special reports or supplemental schedules‖ and are not the basic
general purpose financial statement.
Under such circumstances governmental units may prepare two sets of financial statements one
set
i) In compliance with legal requirements
ii) In conformity with GAAP
 PRINCIPLE TWO
Fund Accounting System
Governmental accounting systems should be organized and operated on a fund basis.
 PRINCIPLE THREE
Types of Fund Account Group
State and local government uses 11 fund types. These fund types are organized in to three
categories; Governmental fund, proprietary fund, and fiduciary funds.
Public Sector Accounting and Civil Society February, 2023 GC
Public Sector Accounting and Civil Society Teaching Material Page 25
 PRINCIPLE FOUR
Number of Funds
Governmental units should establish and maintain those funds required by law and sound
financial administration. Only the minimum number of funds consistent with legal and operating
requirements should be established. However, since unnecessary funds result in inflexibility,
undue complexity and inefficient financial administration the government must establish and
maintain those funds required by law or contractual agreement. Also, the unit should maintain
other funds that assist in assuring effective control over its finances.
 PRINCIPLE SIX
Reporting and valuation of capital (fixed) asset Reporting fixed asset
A clear distinction should be made between general capital assets and capital assets of
proprietary and fiduciary funds.
 Capital assets of proprietary funds should be reported in both the government wide and fund
financial statements.
 Capital assets of fiduciary funds should be reported in only the statement of fiduciary net
assets.
 All other capital assets of the governmental funds should be reported in the governmental
activities column in the governmental –wide statement of net assets.
VALUATION OF FIXED ASSET
Capital assets should be reported at historical cost. The cost of a capital asset should include
capitalized interest and supplementary charges necessary to place the asset into its intended
location and condition for use. Donated capital assets should be reported at their estimated
fair value at the time of the acquisition plus ancillary charges, if any needed to place the asset
in service.
According to statement No 34 capital asset includes, land, improvement to land, buildings,
building improvement, vehicles, machinery, equipment, work of art and historical treasures,
infrastructure, and all other tangible assets that is used in operations and that have initial useful
lives extended beyond a single reporting period. Infrastructure assets are long-lived assets that
normally are stationary in nature and normally can be preserved for a significantly
Public Sector Accounting and Civil Society February, 2023 GC
Public Sector Accounting and Civil Society Teaching Material Page 26
greater number of years than most capital assets. Example include roads, bridge, tunnel, drainage
system, water and sewer system, dams, and lighting system
 PRINCIPLE SEVEN
Depreciation of Fixed Assets
Capital assets should be depreciated over their estimated useful lives unless they are either
inexhaustible or are infrastructure assets using the modified approach as set forth in GASB
Statement No. 34. Inexhaustible assets such as land and land improvements should not be
depreciated. Depreciation expense should be reported in the government wide statement of
activities, as an expense in the statement of revenues, expenses and changes in fund net assets in
proprietary fund, and the statement of changes in fiduciary net assets.
 PRINCIPLE EIGHT
Basis of Accounting
Measurement focus and Basis of Accounting in the Basic Financial Statements a.
Government-wide Financial Statements
The government-wide statement of net assets and statement of activities should be prepared
using the economic resources measurement focus and the accrual basis of accounting.
Revenues, expenses, gains, losses, assets, and liabilities resulting from the exchange and
exchange-like transactions should be recognized when the exchange takes place.
b. Fund Financial Statements
In fund financial statements, the modified accrual or accrual basis of accounting if appropriate
should be used in measuring financial position and operation results.
(1) Financial statements for governmental funds should be presented using the current financial
resources measurement focus and the modified accrual basis of accounting. Revenues
should be recognized in the accounting period in which they become available and measurable.
Expenditures should be recognized in the accounting period in which the fund liability is
incurred, if measurable, except for un matured interest on general long-term liabilities,
which should be recognized when due.
(2) Proprietary fund statements of net assets and revenues, expenses, and changes in fund net
assets should be presented using the economic resources measurement focus and the accrual
basis of accounting.
(3) Financial statements of fiduciary funds should be reported using the economic resources
measurement focus and the accrual basis of accounting, except for the recognition of certain
liabilities of defined benefit pension plans and certain postemployment healthcare plans.
(4) Transfers (between funds) should be reported in the accounting period in which the inter fund
receivable and payable arise.
Most of the governmental fund types (general funds, special revenue funds, capital projects
funds, and debt service funds) are not concerned with income determination. These funds are
concerned with matching expenditures of legal appropriations, or legal authorizations, with
revenues available to finance expenditures
The modified accrual basis requires recognition of revenues in the period in which they become
available and measurable. Measurable means capable of being expressed in monetary terms;
available is defined as ―collectible within the current period or soon enough thereafter to be
used to pay liabilities of the current period.‖ In respect to expenditure recognition, the modified
accrual basis is almost identical to the accrual basis.
 PRINCIPLE NINE
Budgeting, Budgetary Control, and Budgetary Report
The importance of budgeting, budgetary control and budgetary accountability is recognized in
the principle as follows.
a) An annual budget(s) should be adopted by every governmental unit.
b) The accounting system should provide the basis for appropriate budgetary control.
c) Budgetary comparisons should be included in the appropriate financial statements and
schedules for governmental funds for which an annual budget has been adopted. The budgetary
comparison Schedule should present both
 The original and
 The final appropriated budgets for the reporting period as well as
 Actual inflows, outflows, and balances, stated on the government‘s budgetary basis.
Part (a) above is not an accounting or financial reporting principle, but it is a necessary
precondition to parts (b) and (c). A budget, when adopted according to procedures specified in
state laws, is binding on the administrators of a governmental unit. Accordingly, budgetary
accounts are opened as of the beginning of each fiscal year and closed as of the end of each fiscal
year; therefore, they have no balances at year end. During the year, however, the budgetary
accounts of a fund are integrated with its proprietary (balance sheet and operating statement)
accounts
Budgets have a great role in governmental accounting than in profit making business
because governmental budgets are fixed by law and are generally unchangeable. So that
exceeding them may carry secure penalties. Budget in profit making enterprises are usually more
flexible and can change as conditions change during the year.
 PRINCIPLE TEN
Transfer, Revenues, Expenditure and Expense Account
a) Inter fund transfers and proceeds of general long term debt issues should be classified
separately from fund revenues and expenditures or expenses.
b) Governmental fund revenues should be classified by funds and fund source.
Expenditures should be classified by fund, function (or program), organization unit, activity,
character and principal classes of objects.
c) Proprietary fund revenues and expenses should be classified essentially in the same manner as
those of similar business organization functions or activities.
d) The statement of activities should present governmental activities at least at the level of
detail required in the governmental fund statement of revenues expenditures, and changes in fund
balances at a minimum by function. Governments should present business type activities at least
by segment.
 PRINCIPLE ELEVEN
Common Terminology and Classification
A common terminology and classification should be used consistently throughout the budget, the
accounts and the financial reports of each fund. The common Terminology and classification
principles is simply a statement of the commonsense proposition that if the Budgeting,
Budgetary control and Budgetary Reporting principle is to be implemented, persons responsible
for preparing the budgets and persons responsible for preparing the financial statements and
financial reports should work with the persons responsible for designing and operating the
accounting system. Agreement on a common terminology and classification scheme is needed to
make sure the accounting system produces the information needed for budget preparation and for
financial statement and report preparation.
Public Sector Accounting and Civil Society February, 2023 GC
Public Sector Accounting and Civil Society Teaching Material Page 29
 PRINCIPLE TWELVE
Financial Reports
The final principle emphasizes the importance of both interim internal financial reporting and
external annual financial reporting.
Interim and Annual Financial Reports
a. Appropriate interim financial statements and reports of financial position, operating results and
other pertinent information should be prepared to facilitate management control of financial
operations, legislative oversight, and where necessary or desired, for external reporting purposes.
b. A comprehensive annual financial report covering all funds and account groups of the
reporting entity including introductory section, appropriate combined, combining and individual
fund statements, notes to the financial statements, required supplementary information,
schedules, narrative explanations, and statistical table should be prepared and published.
c. General purpose financial statements of the reporting entity may be issued separately from the
comprehensive annual financial report. Such statements should include the basic financial
statements and notes to the financial statements that are essential to fair presentation of financial
position and result of operations (and cash flows of proprietary funds and non-expendable trust
funds). Those statements may also be required to be accompanied, by required supplementary
information, essential to financial reporting of certain entities.
d. A component unit financial report covering all funds and account groups of a component unit
including introductory section, appropriate combined, combining and individual fund statement,
notes to the financial statements, schedules, narrative explanation and statistical tables may be
prepared and published, as necessary.
e. Component unit financial statements of a component unit may be issued separately from the
component unit financial report such statement should include the basic financial statements and
notes to the financial statements that are essential to the fair presentation of financial position
and result of operations.
2.7.BUDGETING IN NOT FOR PROFIT ENTITIES
2.7.1.Definition
- Budget is a monetary or quantitative expression of planning.
- Budget is a plan of financial operation embodying an estimate of proposed expenditures for a
given time and the proposed means of financing them.
- Budgeting is the process of allocating scarce resources to unlimited demands.
We might summarize the process of budgeting into three basic questions.
3. How much can we spend?
4. Why we will spend it?
5. Where will we get the money from?
2.8.USEFULNESS OF BUDGETING
In governments, the budget is used for planning, especially in clarifying priority goals. However,
government administrators often overlook the planning aspects of a budget and use the
government budget primarily as a control device. The government will have certain objectives,
and it assigns resources – money, personnel, etc. for the accomplishment of those objectives.
The budget is a way of controlling the assigned resources; ensuring that they are used for the
intended purpose.
Specifically, budgeting among others has the following purposes or benefits:
- It enforces planning
- It facilitates coordination and communication
- It helps resource allocation
- It provides control tools
2.9.OVERVIEW OF THE BUDGETING PROCESS
There are five phases in budgeting process:
Preparation–Deciding how much to spend for what purpose, and estimating how much income
and from what source it will come.
Legislative Enactment – The approval of the budget by the responsible authority. Legislative
Enactment is done this year for next year‘s budget. Administration- Checking to see that the
approved budget is being adhered to. Reporting – Letting the responsible authority know the
results of the budget.
Public Sector Accounting and Civil Society February, 2023 GC
Public Sector Accounting and Civil Society Teaching Material Page 31
Post audit - Examination of the transactions and events which have already occurred and on
which the report is based. Ethiopians governmental entities use a Hamle 1 to Sene 30 fiscal year.
2.10. RECORDING BUDGETARY ENTRY
The estimated revenues estimated other financing sources, appropriations and estimated other
financing uses are recorded in the books as a major feature of accounting system.
The entry is recorded in the amounts approved by the legislative body.
At the beginning of the year budget established by the government is recorded as follows:
Estimated revenue XXX
Estimated other financing sources XXX
Appropriations
XXX
Justice for Accounting and Finance students, [7/12/23, 7:00 PM]
Which of the following is an example of a plant asset?
a. Accounts Receivable
b. Inventory
c. Machinery
d. Accounts Payable
Solution: c. Machinery
Which of the following is an example of land improvements?
a. Building
b. Parking lot
c. Office furniture
d. Inventory
Solution: b. Parking lot
What is the cost of a piece of equipment that was purchased for $10,000 and had $500 of freight-
in costs?
a. $9,500
b. $10,000
c. $10,500
d. $11,000
Solution: c. $10,500
What is the estimated useful life of a building that is expected to last 30 years?
a. 10 years
b. 20 years
c. 30 years
d. 40 years
Solution: c. 30 years
What is depreciation?
a. An increase in the value of an asset
b. A decrease in the value of an asset
c. An increase in revenue
d. A decrease in expenses
Solution: b. A decrease in the value of an asset
Which of the following is an example of a current asset?
a. Land
b. Building
c. Equipment
d. Inventory
Solution: d. Inventory
What is the difference between book value and market value?
a. Book value is the amount paid for an asset and market value is the estimated worth of the asset
b. Market value is the amount paid for an asset and book value is the estimated worth of the asset
c. Book value is the estimated worth of an asset and market value is the market price of the asset
d. Market value is the estimated worth of an asset and book value is the balance sheet value of
the asset
Solution: d. Market value is the estimated worth of an asset and book value is the balance sheet
value of the asset
Which of the following is not a method of calculating depreciation?
a. Straight-line
b. Double-declining balance
c. Sum-of-years-digits
d. Cash-basis
Solution: d. Cash-basis
Which of the following is a contra-asset account?
a. Accumulated Depreciation
b. Prepaid Rent
c. Goodwill
d. Accounts Payable
Solution: a. Accumulated Depreciation
What is the formula for calculating straight-line depreciation?
a. (Cost – Salvage Value) / Useful Life
b. Cost * Useful Life
c. Cost / (Useful Life – Salvage Value)
d. Cost – Salvage Value
Solution: a. (Cost – Salvage Value) / Useful Life
If a piece of equipment was purchased for $5,000, has a salvage value of $1,000 and an
estimated useful life of 5 years, what is the annual depreciation expense using the straight-line
method?
a. $1,000
b. $800
c. $600
d. $400
Solution: b. $800
Which of the following is not a factor in determining the useful life of an asset?
a. Age of the asset
b. Estimated resale value of the asset
c. Maintenance costs of the asset
d. Usage of the asset
Solution: b. Estimated resale value of the asset
Which of the following is not a component of the cost of a building?
a. Purchase price
b. Legal fees associated with the purchase
c. Closing costs
d. Annual property taxes
Solution: d. Annual property taxes
What is the gain or loss on the disposal of an asset?
a. It is the difference between the book value and the market value of the asset
b. It is the difference between the cost and the book value of the asset
c. It is the difference between the cost and the market value of the asset
d. It is the amount paid for the asset
Solution: b. It is the difference between the cost and the book value of the asset
Which of the following is an advantage of the straight-line method of depreciation?
a. It is the easiest method to calculate
b. It results in the highest annual depreciation expense
c. It produces a more uniform expense over the life of the asset
d. It produces the lowest annual depreciation expense
Solution: c. It produces a more uniform expense over the life of the asset
Which of the following is a factor in determining the salvage value of an asset?
a. The cost of the asset
b. The estimated useful life of the asset
c. The condition of the asset
d. The estimated resale value of the asset

Justice for Accounting and Finance students, [7/12/23, 7:00 PM]

Solution: d. The estimated resale value of the asset
Which of the following is an example of an intangible asset?
a. Buildings
b. Equipment
c. Goodwill
d. Land
Solution: c. Goodwill
Which of the following is not an example of a repair expense?
a. Replacing a lightbulb
b. Replacing a window
c. Replacing a roof
d. Painting a room
Solution: c. Replacing a roof (this would be considered a capital expenditure)
Using the double-declining balance method, what is the depreciation expense for an asset that
cost $10,000 and has a useful life of 5 years?
a. $4,000
b. $3,200
c. $1,600
d. $1,280
Solution: b. $3,200
Which of the following is an example of a natural resource?
a. Machinery
b. Land
c. Patents
d. Accounts Receivable
Solution: b. Land
Which of the following is the correct order of steps in the disposal of an asset?
a. Update the Accumulated Depreciation account, record the gain or loss on disposal, remove the
asset from the books
b. Record the gain or loss on disposal, remove the asset from the books, update the Accumulated
Depreciation account
c. Remove the asset from the books, update the Accumulated Depreciation account, record the
gain or loss on disposal
d. None of the above
Solution: b. Record the gain or loss on disposal, remove the asset from the books, update the
Accumulated Depreciation account
Which of the following is not a factor in determining the cost of a piece of equipment?
a. Purchase price
b. Freight-in costs
c. Installation costs
d. Annual maintenance costs
Solution: d. Annual maintenance costs
Which of the following is an example of an intangible asset with a limited life?
a. Patents
b. Trademarks
c. Copyrights
d. Goodwill
Solution: a. Patents
What is the carrying value of a building that was purchased for $1 million, has $200,000 of
accumulated depreciation, and a market value of $900,000?
a. $900,000
b. $800,000
c. $1 million
d. $1.1 million
Solution: b. $800,000
Which of the following is not a component of the cost of land?
a. Purchase price
b. Legal fees associated with the purchase
c. Closing costs
d. Annual property taxes
Solution: d. Annual property taxes
Ethiopian exit exam questions and answers pdf part 2
Under the straight-line method, what is the annual depreciation expense for an asset that cost
$50,000 and has a useful life of 10 years?
a. $5,000
b. $4,000
c. $3,500
d. $2,500
Solution: a. $5,000
Which of the following is a disadvantage of the double-declining balance method?
a. It is more difficult to calculate than other methods
b. It does not take salvage value into account
c. It results in a less uniform expense over the life of the asset
d. It results in a lower annual depreciation expense than other methods
Solution: c. It results in a less uniform expense over the life of the asset
Which of the following is an example of a long-term investment?
a. Accounts Receivable
b. Inventory
c. Treasury Stock
d. Land
Solution: d. Land
Which of the following is an example of a natural resource with a finite life?
a. Timber
b. Oil
c. Land
d. Water
Solution: b. Oil
Which of the following is a component of the cost of a patent?
a. Legal fees associated with obtaining the patent
b. Annual maintenance costs of the patent
c. The estimated resale value of the patent
d. All of the above are components of the cost of a patent
Solution: a. Legal fees associated with obtaining the patent
Which of the following is not a component of property, plant, and equipment?
a. Buildings
b. Equipment
c. Patents
d. Land
Solution: c. Patents
What is the formula for calculating double-declining balance depreciation?
a. (Cost – Salvage Value) / Useful Life
b. (2 x Straight-line rate) x Beginning book value
c. Cost / Useful Life
d. Cost – Accumulated Depreciation
Solution: b. (2 x Straight-line rate) x Beginning book value
Which of the following is not a method of calculating depletion?

Justice for Accounting and Finance students, [7/12/23, 7:00 PM]

a. Straight-line
b. Double-declining balance
c. Units of production
d. Cost-benefit
Solution: d. Cost-benefit
Which of the following is an example of a current liability?
a. Mortgage Payable
b. Accounts Payable
c. Long-Term Notes Payable
d. Bonds Payable
Solution: b. Accounts Payable
What is a capital expenditure?
a. An expense that is incurred to maintain an asset
b. An expense that is incurred to upgrade an asset
c. An expense that is incurred to repair an asset
d. An expense that is incurred to dispose of an asset
Solution: b. An expense that is incurred to upgrade an asset
Which of the following is not a factor in determining the fair value of an asset?
a. Age of the asset
b. Market conditions
c. Overall economic conditions
d. Estimated useful life of the asset
Solution: d. Estimated useful life of the asset
Which of the following is not a component of the cost of an intangible asset?
a. Legal fees associated with obtaining the asset
b. Annual maintenance costs of the asset
c. The estimated resale value of the asset
d. All of the above are components of the cost of an intangible asset
Solution: b. Annual maintenance costs of the asset
What is an impairment loss?
a. A loss caused by damage to an asset
b. A loss caused by the sale of an asset
c. A loss caused by the disposal of an asset
d. A loss caused by the decline in value of an asset
Solution: d. A loss caused by the decline in value of an asset
Which of the following is not a factor in determining the cost of a building?
a. Purchase price
b. Legal fees associated with the purchase
c. Closing costs
d. Annual depreciation
Solution: d. Annual depreciation
Which of the following is an example of a natural resource with an infinite life?
a. Land
b. Timber
c. Oil
d. Water
Solution: a. Land
Which of the following is an example of a betterment?
a. Replacing a lightbulb
b. Replacing a window
c. Adding a security system to a building
d. Painting a room
Solution: c. Adding a security system to a building
Which of the following is an advantage of the units of production method of depreciation?
a. It results in a more uniform expense over the life of the asset
b. It is the easiest method to calculate
c. It produces the lowest annual depreciation expense
d. It results in the highest annual depreciation expense
Solution: a. It results in a more uniform expense over the life of the asset
Which of the following is not a factor in determining the fair value of a liability?
a. Interest rates
b. Creditworthiness of the debtor
c. Term of the liability
d. The company’s level of debt
Solution: d. The company’s level of debt
Which of the following is not a component of accumulated depreciation?
a. Depreciation expense
b. Maintenance costs
c. Book value
d. Depreciation method used
Solution: b. Maintenance costs
Which of the following is an example of a natural resource with an indefinite life?
a. Timber
b. Oil
c. Land
d. Water
Solution: c. Land
Which of the following is not an example of a capital expenditure?
a. Replacing a roof
b. Remodeling a room
c. Repairing a leaky faucet
d. Adding insulation to a building
Solution: c. Repairing a leaky faucet
Which of the following is a disadvantage of the units of the production method of depreciation?
a. It results in a less uniform expense over the life of the asset
b. It is difficult to calculate
c. It produces the highest annual depreciation expense
d. It does not take salvage value into account
Solution: a. It results in a less uniform expense over the life of the asset
What is a partial year of depreciation?
a. Only part of the annual depreciation expense is recorded in the first year of an asset’s life
b. Depreciation is only recorded in the last year of an asset’s life
c. The annual depreciation expense is prorated based on the number of days in the year the asset
was used

Justice for Accounting and Finance students, [7/12/23, 7:00 PM]

d. None of the above
Solution: c. The annual depreciation expense is prorated based on the number of days in the year
the asset was used
Which of the following is an example of a deferred expense?
a. Prepaid Rent
b. Accumulated Depreciation
c. Treasury Stock
d. Land
Solution: a. Prepaid Rent
Which of the following is an example of a deferred revenue?
a. Accounts Receivable
b. Accumulated Depreciation
c. Unearned Rent
d. Buildings
Solution: c. Unearned Rent