IAB Financial Accounting & Reporting 2 — Questions and Answers
Question 1: Under the accrual basis of accounting, revenue is recognized when:
- Cash is received from the customer
- It is earned and realizable, regardless of when cash is received (Correct answer)
- An invoice is sent to the customer
- The customer places an order
Correct answer: It is earned and realizable, regardless of when cash is received
Accrual accounting requires revenue to be recognized when earned and realizable, not when cash changes hands.
Question 2: Which financial statement shows a company's financial position at a specific point in time?
- Income Statement
- Statement of Cash Flows
- Balance Sheet (Correct answer)
- Statement of Retained Earnings
Correct answer: Balance Sheet
The Balance Sheet (Statement of Financial Position) reports assets, liabilities, and equity as of a specific date.
Question 3: If a company has total assets of $500,000 and total liabilities of $180,000, what is the owner's equity?
- $680,000
- $320,000 (Correct answer)
- $180,000
- $500,000
Correct answer: $320,000
Using the accounting equation: Equity = Assets − Liabilities = $500,000 − $180,000 = $320,000.
Question 4: What does the term 'contra account' mean?
- An account that records foreign currency transactions
- An account with a balance opposite to its paired account, reducing its net value (Correct answer)
- A temporary account closed at year-end
- An account used only for error corrections
Correct answer: An account with a balance opposite to its paired account, reducing its net value
A contra account carries a balance opposite to its related account to reduce the carrying value (e.g., Accumulated Depreciation reduces Equipment).
Question 5: Which inventory costing method assumes the most recently purchased items are sold first?
- FIFO
- Weighted Average
- LIFO (Correct answer)
- Specific Identification
Correct answer: LIFO
LIFO (Last-In, First-Out) assumes the most recently acquired inventory units are the first to be sold.
Question 6: Prepaid insurance appearing on the balance sheet is classified as:
- A long-term liability
- A current asset (Correct answer)
- Owner's equity
- An operating expense
Correct answer: A current asset
Prepaid insurance is a current asset because it represents a future economic benefit to be consumed within one year.
Question 7: Which of the following best describes 'depreciation' in accounting?
- The market value decline of an asset
- A cash payment to replace worn-out equipment
- The systematic allocation of a tangible asset's cost over its useful life (Correct answer)
- An increase in the book value of an asset over time
Correct answer: The systematic allocation of a tangible asset's cost over its useful life
Depreciation is the process of systematically expensing the cost of a long-lived tangible asset over its estimated useful life.
IAB Financial Accounting & Reporting 2
Under the accrual basis of accounting, revenue is recognized when: