Business Degree Accounting Principles 2 — Questions and Answers
Question 1: Depreciation in accounting is best described as:
- The decline in market value of an asset
- The allocation of an asset's cost over its useful life (Correct answer)
- The cash paid to acquire an asset
- The increase in an asset's value over time
Correct answer: The allocation of an asset's cost over its useful life
Depreciation is the systematic allocation of a tangible asset's cost over its estimated useful life, not a measure of market value change.
Question 2: Which accounting concept assumes that a business will continue to operate indefinitely into the future?
- Consistency Principle
- Materiality Principle
- Going Concern Concept (Correct answer)
- Conservatism Principle
Correct answer: Going Concern Concept
The going concern concept assumes a business will remain in operation long enough to fulfill its objectives, which is why assets are recorded at cost rather than liquidation value.
Question 3: Accounts payable is classified on the balance sheet as a:
- Current Asset
- Long-term Asset
- Current Liability (Correct answer)
- Long-term Liability
Correct answer: Current Liability
Accounts payable represents amounts owed to suppliers that are typically due within 30–90 days, making it a current (short-term) liability.
Question 4: The process of recording financial transactions in a journal in chronological order is called:
- Posting
- Journalizing (Correct answer)
- Adjusting
- Closing
Correct answer: Journalizing
Journalizing is the first step of the accounting cycle, where transactions are recorded chronologically in the general journal before being posted to the ledger.
Question 5: At the end of an accounting period, net income is transferred to which account?
- Revenue
- Cash
- Retained Earnings (Correct answer)
- Capital Stock
Correct answer: Retained Earnings
At period-end, net income increases retained earnings through the closing process, accumulating profits that have not been distributed as dividends.
Question 6: Which financial ratio measures a company's ability to pay its short-term obligations with its current assets?
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Return on equity
- Gross profit margin
Correct answer: Current ratio
The current ratio (Current Assets ÷ Current Liabilities) measures short-term liquidity; a ratio above 1.0 indicates the company can cover its near-term obligations.
Question 7: Under Generally Accepted Accounting Principles (GAAP), assets are primarily recorded at:
- Market value
- Replacement cost
- Historical cost (Correct answer)
- Fair value
Correct answer: Historical cost
GAAP's historical cost principle requires assets to be recorded at their original purchase price, providing an objective and verifiable basis for valuation.
Business Degree Accounting Principles 2
Depreciation in accounting is best described as: