Assets Quiz: 50 True or False Questions with Answers and Detailed Explanations

Question 1

True or False: Assets are resources owned or controlled by a business that provide future economic benefits.

✅ Answer: True

Explanation:
Assets are valuable resources that a company owns or controls and expects to use to generate future economic benefits. Examples include cash, inventory, equipment, and accounts receivable.

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Question 2

True or False: Assets are reported on the income statement.

❌ Answer: False

Explanation:
Assets are reported on the balance sheet, not the income statement. The income statement reports revenues, expenses, and net income.

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Question 3

True or False: Cash is considered a current asset.

✅ Answer: True

Explanation:
Cash is the most liquid current asset because it can be used immediately to pay obligations and fund operations.

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Question 4

True or False: Accounts Receivable is a liability.

❌ Answer: False

Explanation:
Accounts Receivable is an asset because it represents money owed to the company by customers.

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Question 5

True or False: Inventory is classified as a current asset.

✅ Answer: True

Explanation:
Inventory is expected to be sold within the normal operating cycle, making it a current asset.

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Question 6

True or False: Buildings are usually classified as current assets.

❌ Answer: False

Explanation:
Buildings are long-term assets used in operations and are classified as non-current or fixed assets.

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Question 7

True or False: Land is generally not depreciated.

✅ Answer: True

Explanation:
Land usually has an unlimited useful life and therefore is not depreciated under normal circumstances.

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Question 8

True or False: Patents are tangible assets.

❌ Answer: False

Explanation:
Patents are intangible assets because they have no physical form but provide future economic benefits.

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Question 9

True or False: Assets normally have debit balances.

✅ Answer: True

Explanation:
Asset accounts increase with debits and decrease with credits, giving them a normal debit balance.

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Question 10

True or False: Prepaid Insurance is considered an asset.

✅ Answer: True

Explanation:
Prepaid insurance represents a future benefit and is therefore recorded as an asset until the coverage period expires.

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Question 11

True or False: Equipment used in business operations is a fixed asset.

✅ Answer: True

Explanation:
Equipment provides benefits for multiple accounting periods and is classified as a fixed asset.

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Question 12

True or False: Accounts Payable is an asset account.

❌ Answer: False

Explanation:
Accounts Payable is a liability because it represents amounts owed to suppliers.

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Question 13

True or False: Assets appear on the left side of the accounting equation.

✅ Answer: True

Explanation:
The accounting equation is: Assets = Liabilities + Owner’s Equity.

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Question 14

True or False: A trademark is an intangible asset.

✅ Answer: True

Explanation:
A trademark provides legal protection and future economic value without physical substance.

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Question 15

True or False: Inventory is depreciated each year.

❌ Answer: False

Explanation:
Inventory is sold rather than depreciated. Depreciation applies to long-term tangible assets.

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Question 16

True or False: Cash equivalents are classified as current assets.

✅ Answer: True

Explanation:
Cash equivalents are short-term highly liquid investments readily convertible into cash.

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Question 17

True or False: Goodwill is an intangible asset.

✅ Answer: True

Explanation:
Goodwill arises during business acquisitions and represents intangible value such as reputation and customer relationships.

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Question 18

True or False: Machinery is usually depreciated over its useful life.

✅ Answer: True

Explanation:
Depreciation allocates the cost of machinery over the periods benefiting from its use.

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Question 19

True or False: Assets decrease with debit entries.

❌ Answer: False

Explanation:
Assets increase with debits and decrease with credits.

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Question 20

True or False: Accounts Receivable arises when a company sells on credit.

✅ Answer: True

Explanation:
Credit sales create a legal claim against customers, resulting in Accounts Receivable.

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Question 21

True or False: A company vehicle is usually classified as a fixed asset.

✅ Answer: True

Explanation:
Vehicles used in operations provide long-term benefits and are fixed assets.

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Question 22

True or False: Cash is generally listed first among assets on the balance sheet.

✅ Answer: True

Explanation:
Assets are typically listed according to liquidity, with cash appearing first.

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Question 23

True or False: Copyrights are current assets.

❌ Answer: False

Explanation:
Copyrights are intangible non-current assets.

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Question 24

True or False: An asset must always have physical substance.

❌ Answer: False

Explanation:
Intangible assets such as patents and trademarks do not have physical substance.

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Question 25

True or False: Supplies are usually classified as current assets.

✅ Answer: True

Explanation:
Supplies are expected to be consumed within a short period.

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Question 26

True or False: Long-term investments are non-current assets.

✅ Answer: True

Explanation:
These investments are not expected to be converted into cash within one year.

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Question 27

True or False: Inventory includes goods available for sale.

✅ Answer: True

Explanation:
Inventory consists of products held for resale to customers.

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Question 28

True or False: Buildings are intangible assets.

❌ Answer: False

Explanation:
Buildings are tangible assets because they have physical form.

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Question 29

True or False: Accumulated Depreciation is a contra-asset account.

✅ Answer: True

Explanation:
It reduces the carrying value of related fixed assets.

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Question 30

True or False: Assets help businesses generate future revenue.

✅ Answer: True

Explanation:
Assets provide the resources necessary for business operations and profit generation.

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Question 31

True or False: A company can record cash as an asset.

✅ Answer: True

Explanation:
Cash is one of the most important assets because it can be used immediately to meet business needs.

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Question 32

True or False: Inventory is considered a liability until sold.

❌ Answer: False

Explanation:
Inventory is always an asset because it has future economic value.

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Question 33

True or False: Land is a tangible asset.

✅ Answer: True

Explanation:
Land has physical substance and is therefore classified as a tangible asset.

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Question 34

True or False: Prepaid Rent is recorded as an expense immediately when paid.

❌ Answer: False

Explanation:
It is initially recorded as an asset and expensed over time.

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Question 35

True or False: Assets can be either current or non-current.

✅ Answer: True

Explanation:
This classification depends on when the asset is expected to be used or converted into cash.

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Question 36

True or False: Notes Receivable can be classified as an asset.

✅ Answer: True

Explanation:
It represents amounts owed to the company and is therefore an asset.

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Question 37

True or False: Patents are reported as liabilities.

❌ Answer: False

Explanation:
Patents are intangible assets, not liabilities.

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Question 38

True or False: Assets are financed by liabilities and equity.

✅ Answer: True

Explanation:
This relationship is reflected in the accounting equation.

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Question 39

True or False: Office furniture is generally depreciated.

✅ Answer: True

Explanation:
Furniture has a limited useful life and its cost is allocated through depreciation.

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Question 40

True or False: Cash received from customers increases assets.

✅ Answer: True

Explanation:
Receiving cash increases the company’s cash balance.

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Question 41

True or False: A trademark is a current asset.

❌ Answer: False

Explanation:
Trademarks are generally long-term intangible assets.

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Question 42

True or False: Assets are expected to provide future benefits.

✅ Answer: True

Explanation:
Future economic benefit is one of the key characteristics of an asset.

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Question 43

True or False: Equipment purchased for business use is an expense when acquired.

❌ Answer: False

Explanation:
Equipment is recorded as an asset and expensed gradually through depreciation.

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Question 44

True or False: A decrease in cash reduces total assets.

✅ Answer: True

Explanation:
Cash is an asset, so reducing cash decreases total assets unless another asset increases simultaneously.

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Question 45

True or False: Accounts Receivable is usually collected in cash.

✅ Answer: True

Explanation:
Customers eventually pay the amounts owed, converting receivables into cash.

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Question 46

True or False: Inventory is a non-current asset.

❌ Answer: False

Explanation:
Inventory is generally expected to be sold within one year and is classified as a current asset.

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Question 47

True or False: Goodwill can exist without physical substance.

✅ Answer: True

Explanation:
Goodwill is an intangible asset derived from business reputation and customer relationships.

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Question 48

True or False: Assets are essential for business operations.

✅ Answer: True

Explanation:
Businesses rely on assets such as cash, inventory, equipment, and technology to operate effectively.

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Question 49

True or False: All assets are expected to provide no future benefit.

❌ Answer: False

Explanation:
The primary reason an item is classified as an asset is its expected future economic benefit.

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Question 50

True or False: Effective asset management can improve a company’s financial performance.

✅ Answer: True

Explanation:
Proper management of assets improves liquidity, efficiency, profitability, and long-term business success. Asset utilization is an important measure of financial performance.

Part 1: Classification & Characteristics of Assets (Questions 1-10)

Q1. Legal ownership is an absolute requirement for an economic resource to be classified as an asset by a business.

• Answer: FALSE

• Explanation: While legal title often accompanies an asset, it is not a strict requirement. The key criterion is control. For example, under modern lease accounting (IFRS 16 / ASC 842), a lessee recognizes a “Right-of-Use Asset” even though they do not legally own the leased property.

Q2. All assets must have physical substance to be reported on the balance sheet.

• Answer: FALSE

• Explanation: Assets are divided into tangible (with physical substance, like machinery) and intangible (without physical substance, like patents, trademarks, and goodwill). Both are reported on the balance sheet.

Q3. Prepaid expenses are classified as current assets because they represent future cash inflows.

• Answer: FALSE

• Explanation: Prepaid expenses are current assets because they represent future economic benefits that will avoid cash outflows or the consumption of resources within one year, not because they will generate direct cash inflows.

Q4. An operating cycle is the time it takes a company to spend cash on inventory, sell the inventory, and collect cash from customers.

• Answer: TRUE

• Explanation: This is the exact definition of an operating cycle. If this cycle is longer than one year (e.g., in shipbuilding or winemaking), the operating cycle is used instead of one year to classify current assets.

Q5. Land held for long-term capital appreciation should be classified under Property, Plant, and Equipment (PPE).

• Answer: FALSE

• Explanation: PPE includes assets used in the active, daily operations of the business. Land held purely for speculation or future capital growth is classified under “Long-term Investments” or “Investment Property.”

Q6. Monetary assets include cash, accounts receivable, and short-term investments because their value is fixed in terms of currency units.

• Answer: TRUE

• Explanation: Monetary assets are claims to a fixed or determinable amount of money. Non-monetary assets include inventory and equipment, whose fair values can fluctuate with market conditions.

Q7. Non-current assets are expected to be converted into cash or consumed within one year from the balance sheet date.

• Answer: FALSE

• Explanation: Non-current assets (or long-term assets) are those expected to provide economic benefits to the entity for a period extending beyond one year or one operating cycle.

Q8. A contra-asset account always carries a normal credit balance.

• Answer: TRUE

• Explanation: Since regular asset accounts carry a normal debit balance, a contra-asset account—designed to reduce the gross value of the asset—must carry a normal credit balance.

Q9. Assets on a US GAAP balance sheet are listed in order of their maturity, with the longest-term assets appearing first.

• Answer: FALSE

• Explanation: Under US GAAP, current assets are listed in order of liquidity (how quickly they can be converted to cash), starting with Cash and Cash Equivalents. Long-term assets appear lower on the sheet.

Q10. A past transaction or event must have occurred for an item to meet the definition of an asset.

• Answer: TRUE

• Explanation: Intended or planned future transactions (e.g., an intention to buy a machine next month) do not create a present asset. The event giving rise to control must have already taken place.

Part 2: Cash, Receivables & Inventory (Questions 11-20)

Q11. Short-term investments that mature within 120 days from the date of acquisition qualify as cash equivalents.

• Answer: FALSE

• Explanation: Standard accounting frameworks specify that an investment must have an original maturity of 90 days (3 months) or less from the date of purchase to qualify as a cash equivalent.

Q12. Under the allowance method, writing off a specific bad debt reduces the net realizable value of accounts receivable.

• Answer: FALSE

• Explanation: The write-off entry debits Allowance for Doubtful Accounts and credits Accounts Receivable for the same amount. Both gross receivables and the allowance account drop equally, keeping Net Realizable Value (NRV) exactly the same.

Q13. The direct write-off method of accounting for bad debts is preferred under GAAP because it adheres strictly to the matching principle.

• Answer: FALSE

• Explanation: The direct write-off method violates the matching principle because it recognizes bad debt expense in a later period when the account is deemed uncollectible, rather than in the period the revenue was generated.

Q14. In a period of rising prices (inflation), the LIFO inventory method yields a higher ending inventory value than the FIFO method.

• Answer: FALSE

• Explanation: Under LIFO, the oldest, cheaper goods remain in inventory, resulting in an understated ending inventory value during inflation. FIFO leaves the newest, more expensive goods in ending inventory.

Q15. Net Realizable Value (NRV) for inventory is calculated as the estimated selling price minus estimated costs of completion and disposal.

• Answer: TRUE

• Explanation: This is the standard formula used under both IFRS and US GAAP to apply the “Lower of Cost or Net Realizable Value” (LCNRV) rule.

Q16. Consignment goods should be included in the inventory of the consignee who is holding them for sale.

• Answer: FALSE

• Explanation: Consignment inventory legally belongs to the consignor (the sender). The consignee (the holder) merely acts as an agent to sell them and does not include them on their own balance sheet.

Q17. Goods shipped FOB Destination should be included in the seller’s inventory until they physically arrive at the buyer’s location.

• Answer: TRUE

• Explanation: “FOB Destination” means ownership and risks stay with the seller while the goods are in transit. The title transfers only upon delivery at the buyer’s destination.

Q18. Overstating ending inventory in the current year will lead to an understatement of net income in the same year.

• Answer: FALSE

• Explanation: Overstating ending inventory understates the Cost of Goods Sold (COGS). When expenses (COGS) are understated, net income becomes overstated.

Q19. A company must use the same inventory costing method (e.g., FIFO) for all inventory types across all business segments under all circumstances.

• Answer: FALSE

• Explanation: While consistency is required within identical lines of inventory, a company can use different methods (e.g., FIFO for raw materials and Weighted Average for finished goods) if justified by the nature and use of the inventory.

Q20. Accounts receivable are initially recorded at their fair value, which is usually the transaction price.

• Answer: TRUE

• Explanation: Receivables arise from revenue transactions and are recorded at the invoice amount (transaction price), which represents the fair value of the consideration to be received.

Part 3: Property, Plant, and Equipment – PPE (Questions 21-35)

Q21. The historical cost of equipment includes the purchase price plus any costs required to safely transport and install the asset.

• Answer: TRUE

• Explanation: Capitalized cost includes all reasonable and necessary costs incurred to acquire the asset and bring it to the location and condition necessary for its intended operational use.

Q22. Land is depreciated using the straight-line method over a standard useful life of 40 years.

• Answer: FALSE

• Explanation: Land is never depreciated because it has an indefinite useful life and is not consumed or worn out by time or usage.

Q23. Book value (or carrying value) of an asset is calculated as its historical cost minus accumulated depreciation.

• Answer: TRUE

• Explanation: This represents the remaining unallocated cost of the tangible asset reported on the face of the balance sheet.

Q24. Accelerated depreciation methods, like Double-Declining Balance, record higher depreciation expense in the later years of an asset’s life.

• Answer: FALSE

• Explanation: Accelerated methods record higher depreciation in the early years and lower depreciation in the later years of an asset’s life.

Q25. Salvage value is subtracted from the asset’s cost to determine the depreciable base under the straight-line method.

• Answer: TRUE

• Explanation: Depreciable base equals Cost minus Salvage Value. This is the total amount of cost that will be systematically allocated over the asset’s life.

Q26. Routine repairs and maintenance that keep an asset in its normal working condition are capitalized as part of the asset’s cost.

• Answer: FALSE

• Explanation: These are revenue expenditures. Because they maintain rather than enhance or extend the asset’s original operational state, they are expensed on the income statement immediately.

Q27. A change in the estimated useful life of a machine requires the company to restate prior years’ financial statements.

• Answer: FALSE

• Explanation: A change in useful life is a change in an accounting estimate. It is handled prospectively, meaning it only affects current and future depreciation calculations; past records are left untouched.

Q28. Under US GAAP, companies are allowed to revalue their PPE upward to reflect current market value on an annual basis.

• Answer: FALSE

• Explanation: US GAAP strictly prohibits the upward revaluation of PPE; assets must be kept at historical cost less accumulated depreciation. Upward revaluation is an option allowed only under IFRS (via the Revaluation Model).

Q29. An impairment loss must be recognized if an asset’s carrying value is higher than its recoverable amount.

• Answer: TRUE

• Explanation: When events show that an asset’s book value can no longer be recovered through future cash flows or sale, the asset is written down to its true recoverable value, recognizing an impairment loss.

Q30. Depletion is the term used to describe the allocation of the cost of intangible assets over time.

• Answer: FALSE

• Explanation: Depletion applies exclusively to natural resources (e.g., oil wells, timber, mines). The allocation of intangible assets is called amortization.

Q31. If an asset is sold for an amount exactly equal to its book value, no gain or loss is reported on the income statement.

• Answer: TRUE

• Explanation: A gain or loss occurs when cash proceeds differ from book value. If Cash Received equals Book Value, the transaction breaks completely even.

Q32. Under the units-of-production method, depreciation expense remains constant every year regardless of asset usage.

• Answer: FALSE

• Explanation: This method bases depreciation on production output or usage (e.g., hours used or units made), meaning the expense changes each year in direct proportion to activity.

Q33. Fully depreciated assets that are still being used by the company must be removed from the balance sheet.

• Answer: FALSE

• Explanation: If a fully depreciated asset is still in active operation, both its historical cost and equal accumulated depreciation remain on the balance sheet to disclose its continued existence.

Q34. Fines paid during the delivery or installation of equipment due to safety violations should be capitalized into the asset’s cost.

• Answer: FALSE

• Explanation: Fines and penalties are unnecessary and avoidable costs. They are not required to get the asset ready for use, so they must be expensed immediately.

Q35. Capital expenditures are outlays that increase the capacity, efficiency, or life span of an existing long-term asset.

• Answer: TRUE

• Explanation: Because these costs provide enhanced economic benefits stretching over future periods, they are added to the asset’s carrying value rather than expensed.

Part 4: Intangible Assets & Goodwill (Questions 36-45)

Q36. Internally developed trademarks and patents are fully capitalized at their estimated market value.

• Answer: FALSE

• Explanation: Internally developed intangibles are generally expensed because it is difficult to determine their objective value. Only minor direct costs, like legal registration fees, can be capitalized.

Q37. Purchased goodwill is subject to annual amortization over a maximum period of 20 years under IFRS and US GAAP.

• Answer: FALSE

• Explanation: Goodwill has an indefinite useful life and is never amortized. Instead, it must be evaluated for impairment at least once a year.

Q38. Under US GAAP, all research costs must be expensed as incurred, but development costs can be capitalized.

• Answer: FALSE

• Explanation: US GAAP requires both research and development (R&D) costs to be expensed as incurred. (Note: Only IFRS allows the capitalization of certain development phase costs).

Q39. An intangible asset with a finite useful life is amortized over its estimated economic life or its legal life, whichever is shorter.

• Answer: TRUE

• Explanation: To remain conservative, amortization should not exceed the lower boundary of either its true economic utility or its legal expiration date.

Q40. Goodwill can be created and recorded on the balance sheet when a company builds a very strong customer service reputation over many years.

• Answer: FALSE

• Explanation: This describes internally generated goodwill, which cannot be recognized. Goodwill can only be recorded when it is purchased through the acquisition of another business entity.

Q41. If a company loses a legal battle defending its patent, the legal costs should be capitalized to enhance the value of the patent.

• Answer: FALSE

• Explanation: An unsuccessful legal defense means the patent is likely invalid or impaired. Therefore, the legal fees are expensed immediately, and the remaining patent value may need a complete write-off.

Q42. Amortization expense for intangible assets is typically recorded using the straight-line method unless another pattern can be objectively demonstrated.

• Answer: TRUE

• Explanation: The straight-line method is the default and most common approach used for intangible asset amortization due to its simplicity and clear representation of time-based expiration.

Q43. Franchise agreements are classified as financial assets rather than intangible assets.

• Answer: FALSE

• Explanation: Franchise agreements grant operational rights without physical substance, which defines them clearly as intangible assets.

Q44. An intangible asset with an indefinite useful life is not amortized but must be tested for impairment annually.

• Answer: TRUE

• Explanation: Because there is no predictable end to its cash-generating lifespan, systematic allocation is impossible, shifting the focus to annual impairment testing.

Q45. When an intangible asset is fully amortized and has no residual value, its net book value on the balance sheet is zero.

• Answer: TRUE

• Explanation: Net book value is Cost minus Accumulated Amortization. When fully amortized with zero salvage value, the net balance rests at zero.

Part 5: Advanced Measurement & Disclosures (Questions 46-50)

Q46. The asset turnover ratio evaluates how effectively a company converts its net income into cash.

• Answer: FALSE

• Explanation: The asset turnover ratio measures efficiency in generating sales/revenues from assets (Net Sales divided by Average Total Assets), not cash or net income.

Q47. Return on Assets (ROA) shows how much profit a company generates for each dollar of assets it controls.

• Answer: TRUE

• Explanation: ROA (Net Income divided by Average Total Assets) directly reflects management’s effectiveness at utilizing assets to generate bottom-line net profit.

Q48. Financial assets held for trading are reported on the balance sheet at fair value, and any unrealized gains or losses are deferred to equity.

• Answer: FALSE

• Explanation: For trading securities, unrealized gains and losses are recognized immediately on the income statement (profit or loss), as they are meant for quick short-term profits.

Q49. If a non-monetary asset exchange transaction lacks commercial substance, any implied gain is usually deferred rather than recognized immediately.

• Answer: TRUE

• Explanation: Lacking commercial substance means the company’s economic position hasn’t changed fundamentally. Under accounting rules, gains are typically deferred by lowering the cost basis of the newly acquired asset.

Q50. Understating depreciation expense in the current year causes total assets to be overstated and net income to be overstated.

• Answer: TRUE

• Explanation: Understating depreciation keeps accumulated depreciation too low (overstating asset book value) and keeps expenses too low (overstating current net income).

 

 

 

Assets Quiz: 50 True or False Questions

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Questions 1–10: Definition & Fundamental Concepts

1. An asset must have a physical form to be recognized in the financial statements.

Answer: False
Explanation: Assets do not need to have physical substance. Intangible assets such as patents, copyrights, trademarks, and goodwill lack physical form but are still recognized as assets if they meet the definition criteria (control, past event, and future economic benefits).

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2. Assets are reported on the Income Statement.

Answer: False
Explanation: Assets are reported on the Balance Sheet (Statement of Financial Position), which presents a company’s financial position at a specific point in time. The Income Statement reports revenues, expenses, and profits over a period of time.

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3. For an item to be recognized as an asset, it must be probable that future economic benefits will flow to the entity.

Answer: True
Explanation: According to the IFRS Conceptual Framework, one of the recognition criteria for an asset is that it is probable that the expected future economic benefits will flow to the entity. The other key criterion is that the cost or value can be measured reliably.

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4. All assets are owned by the reporting entity.

Answer: False
Explanation: The critical concept iscontrol, not legal ownership. For example, under a finance lease, the lessee controls the asset and recognizes it on its balance sheet even though legal title remains with the lessor.

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5. The cost of an asset includes all expenditures necessary to bring it to its intended use.

Answer: True
Explanation: Under the historical cost principle, the cost of a fixed asset includes the purchase price, import duties, non-refundable taxes, transportation costs, installation costs, and any other directly attributable costs required to make the asset ready for its intended use.

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6. A contra-asset account has a normal debit balance.

Answer: False
Explanation: A contra-asset account has a normalcredit balance. It offsets the normal debit balance of its related asset account. Examples include Accumulated Depreciation (offsetting fixed assets) and Allowance for Doubtful Accounts (offsetting Accounts Receivable).

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7. Land is subject to depreciation.

Answer: False
Explanation: Land has an indefinite useful life and does not wear out or get consumed over time. Therefore, it is not depreciated. However, land improvements (such as paving, fencing, and landscaping) are depreciated because they have a finite useful life.

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8. Prepaid expenses are classified as liabilities.

Answer: False
Explanation: Prepaid expenses (such as prepaid rent, prepaid insurance, and supplies) represent payments made in advance for goods or services to be received in the future. They provide future economic benefits and are therefore classified asassets (specifically current assets).

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9. The historical cost of an asset is adjusted annually to reflect its current market value.

Answer: False
Explanation: Under the historical cost convention, assets are recorded at their original cost and are not adjusted for changes in market value. Exceptions exist under the revaluation model (IFRS) or for certain financial instruments measured at fair value, but the general principle is that cost remains the basis.

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10. An asset is recognized when it is probable that future economic benefits will flow and its cost can be measured reliably.

Answer: True
Explanation: This accurately reflects the two recognition criteria for assets under both IFRS and US GAAP. Both conditions must be satisfied before an asset is recorded on the balance sheet.

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Questions 11–20: Current Assets

11. Inventory is classified as a non-current asset.

Answer: False
Explanation: Inventory is acurrent asset because it is expected to be sold, converted into cash, or consumed within the normal operating cycle (usually less than one year). Non-current assets are held for long-term use.

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12. Cash equivalents include investments with maturities of three months or less.

Answer: True
Explanation: Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Examples include Treasury bills, commercial paper, and money market funds with maturities of three months or less.

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13. Outstanding checks are added to the bank balance when preparing a bank reconciliation.

Answer: False
Explanation: Outstanding checks are checks that have been issued and recorded in the books but have not yet cleared the bank. They must bededucted from the bank balance in a bank reconciliation because the bank has not yet reduced the depositor’s account.

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14. The Allowance for Doubtful Accounts is reported as a direct reduction of Accounts Receivable.

Answer: True
Explanation: The Allowance for Doubtful Accounts is a contra-asset account that is subtracted from the gross Accounts Receivable balance to arrive at the net realizable value, which represents the amount expected to be collected.

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15. Under the FIFO method, the cost of goods sold reflects the most recent purchase costs.

Answer: False
Explanation: FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first. Therefore, cost of goods sold reflects theoldest costs, while ending inventory reflects the most recent purchase costs. LIFO (Last-In, First-Out) reflects the most recent costs in cost of goods sold.

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16. LIFO is permitted under both IFRS and US GAAP.

Answer: False
Explanation: LIFO (Last-In, First-Out) isprohibited under IFRS but is still permitted under US GAAP. This is a significant difference between the two frameworks.

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17. During a period of rising prices, FIFO results in a higher gross profit compared to LIFO.

Answer: True
Explanation: When prices are rising, FIFO assigns older, lower costs to cost of goods sold, leaving higher costs in ending inventory. This lower cost of goods sold results in a higher gross profit. LIFO assigns higher costs to cost of goods sold, reducing gross profit.

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18. Petty cash is an example of a long-term investment.

Answer: False
Explanation: Petty cash is a small amount of cash kept on hand for minor expenses. It is acurrent asset (specifically, part of cash and cash equivalents), not a long-term investment.

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19. Accounts Receivable represent amounts owed to the company by its suppliers.

Answer: False
Explanation: Accounts Receivable represent amounts owed to the company by itscustomers for goods or services sold on credit. Amounts owed to suppliers are Accounts Payable, which is a liability.

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20. A deposit made to a utility company is classified as a current asset.

Answer: True
Explanation: Utility deposits are refundable amounts held by the utility company. They are typically expected to be returned within one year, making them a current asset. However, if the deposit is held for several years, it may be classified as non-current.

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Questions 21–30: Non-Current Assets & Depreciation

21. Depreciation is a process of valuation.

Answer: False
Explanation: Depreciation is aprocess of cost allocation, not valuation. It systematically allocates the cost of a tangible asset over its useful life. It does not measure the asset’s market value or determine its worth.

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22. An asset’s salvage value is subtracted from its cost to determine the depreciable base.

Answer: True
Explanation: The depreciable base is calculated as Historical Cost minus Salvage Value (residual value). This is the total amount that will be depreciated over the asset’s useful life.

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23. The double-declining balance method is an accelerated depreciation method.

Answer: True
Explanation: The double-declining balance method applies a depreciation rate that is twice the straight-line rate to the asset’s declining book value. This results in higher depreciation expense in the early years and lower expense in later years, making it an accelerated method.

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24. Amortization is the term used for the allocation of the cost of natural resources.

Answer: False
Explanation: Amortization refers to the allocation of the cost ofintangible assets. Depletion is the correct term for allocating the cost of natural resources (such as oil, gas, and minerals). Depreciation is for tangible fixed assets.

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25. An impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount.

Answer: True
Explanation: Under both IFRS (IAS 36) and US GAAP, impairment exists when the asset’s carrying amount (book value) is higher than its recoverable amount (the higher of fair value less costs to sell and value in use). The asset must be written down to its recoverable amount.

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26. Under IFRS, impairment losses on assets can be reversed if the recoverable amount increases in a later period.

Answer: True
Explanation: Under IFRS, impairment losses (except for goodwill) can be reversed in subsequent periods if the reasons for the impairment no longer exist and the recoverable amount increases. Under US GAAP, reversal of impairment losses is generally prohibited.

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27. Goodwill is amortized over its useful life, not to exceed 40 years.

Answer: False
Explanation: Under both IFRS and US GAAP, goodwill isnot amortized. Instead, it is tested annually for impairment. The old rule (amortizing over 40 years) was eliminated under US GAAP in 2001 (SFAS 142) and under IFRS (IFRS 3) which mandates annual impairment testing.

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28. If a company spends $10,000 on routine maintenance for a machine, this cost should be capitalized.

Answer: False
Explanation: Routine maintenance (such as oil changes or minor repairs) keeps the asset in its normal operating condition but does not extend its useful life or improve its performance. Such costs should beexpensed immediately. Only expenditures that improve the asset or extend its life are capitalized.

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29. The units-of-production depreciation method results in equal depreciation expense each year.

Answer: False
Explanation: The units-of-production method bases depreciation on actual usage or output. Therefore, depreciation expense fluctuates from year to year depending on how much the asset is used. It is the straight-line method that results in equal annual expense.

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30. A building is always classified as a non-current asset.

Answer: True
Explanation: Buildings are long-term assets used in operations and are expected to provide economic benefits for more than one year. Therefore, they are classified as non-current assets (Property, Plant, and Equipment) unless they are specifically held for sale in the ordinary course of business (which would then be inventory).

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Questions 31–40: Intangible Assets & Investments

31. Research costs are capitalized as intangible assets under IFRS.

Answer: False
Explanation: Under IFRS (IAS 38),research costs are always expensed as incurred. However,development costs may be capitalized if they meet strict criteria (technical feasibility, intention to complete, ability to use or sell, etc.).

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32. Development costs can never be capitalized under US GAAP.

Answer: True
Explanation: Under US GAAP (ASC 730), all research and development costs are generally expensed as incurred, with very limited exceptions (such as software development costs under specific circumstances). This is a key difference between IFRS and US GAAP.

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33. A trademark with an indefinite life is amortized over 10 years.

Answer: False
Explanation: Intangible assets with indefinite useful lives (such as certain trademarks and brand names) arenot amortized. Instead, they are tested for impairment at least annually. Only finite-life intangibles are amortized.

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34. Goodwill is the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination.

Answer: True
Explanation: Goodwill arises only in a business combination and represents the premium paid for the acquired entity over the fair value of its identifiable assets, liabilities, and contingent liabilities. It is internally generated goodwill that is not recognized.

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35. Investment property is property held for rental income or capital appreciation.

Answer: True
Explanation: Under IAS 40, investment property is land or buildings held to earn rentals or for capital appreciation (or both). It is distinct from owner-occupied property (which falls under PPE) and inventory (property held for sale).

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36. Financial assets held for trading are measured at amortized cost.

Answer: False
Explanation: Financial assets held for trading are measured atfair value through profit or loss. Amortized cost is used for financial assets held to collect contractual cash flows (such as loans and receivables that meet the SPPI test).

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37. A finance lease gives the lessee the right to use an asset, but the lessee does not recognize the asset on its balance sheet.

Answer: False
Explanation: Under IFRS 16 and US GAAP (ASC 842), a finance lease (or Type A lease) requires the lessee to recognize aright-of-use asset and a corresponding lease liability on the balance sheet. The asset is recognized because the lessee controls the asset.

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38. Deferred tax assets arise when a company has paid more tax than it has recognized as tax expense.

Answer: True
Explanation: Deferred tax assets represent future tax benefits. They arise when tax expense exceeds taxes payable (meaning the company has paid taxes in advance) or when there are tax loss carryforwards that can be used to reduce future taxable income.

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39. The revaluation model under IFRS allows assets to be carried at fair value less subsequent accumulated depreciation.

Answer: True
Explanation: Under IAS 16, the revaluation model permits assets to be carried at their revalued amount (fair value at the date of revaluation) less any subsequent accumulated depreciation and impairment losses. Revaluation increases are recognized in Other Comprehensive Income unless they reverse a previous decrease.

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40. Biological assets (such as livestock) are accounted for under IAS 16 (Property, Plant, and Equipment).

Answer: False
Explanation: Biological assets are accounted for underIAS 41 (Agriculture), not IAS 16. They are measured at fair value less costs to sell, with changes in fair value recognized in profit or loss. IAS 16 applies to tangible fixed assets like machinery and buildings.

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Questions 41–50: Financial Analysis & Advanced Topics

41. The current ratio is calculated as Total Assets divided by Total Liabilities.

Answer: False
Explanation: The current ratio is calculated asCurrent Assets divided by Current Liabilities. It measures a company’s short-term liquidity. Total Assets divided by Total Liabilities is the debt ratio (or total debt to assets ratio).

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42. The quick ratio (acid-test ratio) excludes inventory from current assets.

Answer: True
Explanation: The quick ratio is a more conservative liquidity measure. It excludes inventory and prepaid expenses because these may not be easily converted to cash. The formula is: (Cash + Marketable Securities + Net Receivables) / Current Liabilities.

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43. Assets are presented on the balance sheet in order of liquidity (most liquid first).

Answer: True
Explanation: Assets are typically presented in order of liquidity, meaning current assets (cash, receivables, inventory) are listed first, followed by non-current assets (PPE, intangibles). In some jurisdictions, the reverse order (least liquid first) is used, but liquidity order is most common.

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44. A write-down of inventory to net realizable value is a non-cash expense that reduces total assets.

Answer: True
Explanation: When inventory is written down, a loss (or expense) is recognized in the income statement, and the inventory carrying amount is reduced on the balance sheet. This decreases both net income and total assets, and it is a non-cash adjustment.

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45. The sale of a fixed asset for more than its book value results in a loss.

Answer: False
Explanation: If the sale price exceeds the book value, again is recognized. Aloss occurs when the sale price is less than the book value. The gain or loss is calculated as: Sale Proceeds – Book Value (Cost – Accumulated Depreciation).

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46. Accumulated Depreciation is reported as a liability on the balance sheet.

Answer: False
Explanation: Accumulated Depreciation is acontra-asset account, not a liability. It is reported as a deduction from the related fixed asset (such as equipment or buildings) to arrive at the asset’s net book value.

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47. An asset classified as “held for sale” is no longer depreciated.

Answer: True
Explanation: Under IFRS 5 (and US GAAP), when an asset is classified as held for sale, it is measured at the lower of carrying amount and fair value less costs to sell, anddepreciation stops. The asset is presented separately on the balance sheet.

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48. Internally generated brand names and customer lists can be recognized as intangible assets.

Answer: False
Explanation: Under IFRS (IAS 38), internally generated brands, mastheads, publishing titles, customer lists, and similar items arenot recognized as intangible assets because their cost cannot be reliably distinguished from the cost of developing the business as a whole. Only externally purchased intangibles are recognized.

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49. A company’s total assets must always equal total liabilities plus equity.

Answer: True
Explanation: This is the fundamental accounting equation:Assets = Liabilities + Equity. This equation must always balance. Any transaction affects at least two accounts to maintain this equilibrium.

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50. Cash restrictions due to debt covenants must be disclosed but do not affect asset classification.

Answer: False
Explanation: If cash is restricted for a specific purpose (e.g., a bond sinking fund or compensating balance) and is not available for general use, it may need to be classified asnon-current rather than current. The restriction and its classification must be disclosed in the notes to the financial statements.