IBA Accounting Fundamentals 1 — Questions and Answers
Question 1: Which accounting equation correctly represents the relationship between assets, liabilities, and equity?
- Assets = Liabilities + Equity (Correct answer)
- Assets = Equity - Liabilities
- Liabilities = Assets + Equity
- Equity = Assets + Liabilities
Correct answer: Assets = Liabilities + Equity
The fundamental accounting equation states that Assets equal Liabilities plus Owner's Equity, reflecting that all assets are financed by either debt or equity.
Question 2: Which financial statement shows a company's revenues and expenses over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Statement of Cash Flows
- Statement of Retained Earnings
Correct answer: Income Statement
The Income Statement (also called the Profit and Loss Statement) reports revenues, expenses, and net income or loss over a defined accounting period.
Question 3: Under accrual accounting, revenue is recognized when:
- Cash is received from the customer
- It is earned, regardless of when cash is received (Correct answer)
- The invoice is sent to the customer
- The fiscal year ends
Correct answer: It is earned, regardless of when cash is received
Accrual accounting requires revenue to be recognized when it is earned (i.e., goods delivered or services rendered), not when cash is collected.
Question 4: Depreciation is best described as:
- A method to increase an asset's book value over time
- The allocation of an asset's cost over its useful life (Correct answer)
- A cash expense recorded when an asset is purchased
- The market value decline of an asset
Correct answer: The allocation of an asset's cost over its useful life
Depreciation systematically allocates the cost of a tangible long-term asset across its estimated useful life, matching the expense to the periods it benefits.
Question 5: Which inventory costing method assumes the most recently purchased items are sold first?
- FIFO (First In, First Out)
- LIFO (Last In, First Out) (Correct answer)
- Weighted Average Cost
- Specific Identification
Correct answer: LIFO (Last In, First Out)
LIFO assumes the last (most recently purchased) items are the first to be sold, which can lower taxable income during periods of rising prices.
Question 6: A debit entry to an asset account will:
- Decrease the asset balance
- Increase the asset balance (Correct answer)
- Have no effect on the asset balance
- Transfer the balance to equity
Correct answer: Increase the asset balance
Under double-entry bookkeeping, debits increase asset account balances because assets carry a normal debit balance.
Question 7: Which of the following is an example of a current liability?
- Long-term bonds payable
- Accounts payable (Correct answer)
- Equipment
- Common stock
Correct answer: Accounts payable
Accounts payable are obligations due within one year (or one operating cycle) and are therefore classified as current liabilities on the balance sheet.
IBA Accounting Fundamentals 1
Which accounting equation correctly represents the relationship between assets, liabilities, and equity?