IAB Financial Accounting & Reporting 5 — Questions and Answers
Question 1: Which of the following is an example of an intangible asset?
- Delivery truck
- Accounts receivable
- Patent (Correct answer)
- Prepaid rent
Correct answer: Patent
A patent is an intangible asset — it lacks physical substance but provides future economic benefits through exclusive rights.
Question 2: When the allowance method is used for bad debts, writing off a specific uncollectible account affects:
- Net income and total assets
- Only total assets
- Neither net income nor total assets (Correct answer)
- Only net income
Correct answer: Neither net income nor total assets
Under the allowance method, writing off a specific account reduces both Accounts Receivable and the Allowance for Doubtful Accounts equally, leaving net realizable value and net income unchanged.
Question 3: A company issues a $10,000, 6-month note payable at 8% annual interest. What is the total interest owed at maturity?
- $800
- $400 (Correct answer)
- $480
- $160
Correct answer: $400
Interest = Principal × Rate × Time = $10,000 × 8% × (6/12) = $400.
Question 4: Which of the following would cause an overstatement of net income?
- Understating depreciation expense (Correct answer)
- Overstating cost of goods sold
- Understating sales revenue
- Overstating accounts payable
Correct answer: Understating depreciation expense
Understating depreciation expense reduces total expenses, which artificially inflates the net income figure.
Question 5: The quick ratio (acid-test ratio) excludes which current asset from its calculation?
- Cash
- Accounts Receivable
- Marketable Securities
- Inventory (Correct answer)
Correct answer: Inventory
The quick ratio excludes inventory because it is the least liquid current asset and may not be quickly convertible to cash.
Question 6: Which of the following transactions increases total assets and increases total liabilities?
- Owner invests cash in the business
- Company borrows money from a bank (Correct answer)
- Company collects cash from a customer on account
- Company pays off an outstanding loan
Correct answer: Company borrows money from a bank
Borrowing cash increases the Cash asset and simultaneously creates a Loan Payable liability, leaving equity unchanged.
Question 7: Which accounting concept states that insignificant items need not be treated with strict adherence to GAAP?
- Conservatism
- Consistency
- Materiality (Correct answer)
- Full Disclosure
Correct answer: Materiality
The materiality concept allows immaterial (insignificant) items to be treated in the most practical manner without strict GAAP compliance.
IAB Financial Accounting & Reporting 5
Which of the following is an example of an intangible asset?