IBA Accounting Fundamentals 2 — Questions and Answers
Question 1: The going concern assumption in accounting means:
- A company will liquidate its assets in the near future
- A company will continue to operate indefinitely into the future (Correct answer)
- A company must report assets at current market value
- A company's revenues must exceed its expenses
Correct answer: A company will continue to operate indefinitely into the future
The going concern assumption holds that a business will remain operational for the foreseeable future, justifying the use of historical cost rather than liquidation values.
Question 2: What does the current ratio measure?
- A company's profitability relative to its revenue
- A company's ability to pay short-term obligations with current assets (Correct answer)
- The proportion of debt versus equity financing
- The efficiency of inventory management
Correct answer: A company's ability to pay short-term obligations with current assets
The current ratio (Current Assets ÷ Current Liabilities) measures a company's short-term liquidity and ability to meet near-term obligations.
Question 3: Which of the following represents a non-cash expense?
- Wages expense
- Rent expense
- Depreciation expense (Correct answer)
- Utilities expense
Correct answer: Depreciation expense
Depreciation expense reduces the book value of assets and affects net income but does not involve an actual cash outflow in the period it is recorded.
Question 4: Retained earnings represent:
- The total cash held by the company
- Cumulative net income kept in the business after dividends are paid (Correct answer)
- The par value of shares issued to investors
- Total assets minus total liabilities
Correct answer: Cumulative net income kept in the business after dividends are paid
Retained earnings are the accumulated net profits of a company that have been reinvested in the business rather than distributed to shareholders as dividends.
Question 5: Which accounting concept requires that expenses be recorded in the same period as the revenues they help generate?
- Consistency principle
- Materiality principle
- Matching principle (Correct answer)
- Conservatism principle
Correct answer: Matching principle
The matching principle requires that expenses be recognized in the same accounting period as the revenues they helped to produce, ensuring accurate profit measurement.
Question 6: On the balance sheet, long-term assets are listed:
- Before current assets, in order of decreasing liquidity
- After current assets, in order of decreasing liquidity (Correct answer)
- In alphabetical order after all liabilities
- Only when they exceed $1 million in value
Correct answer: After current assets, in order of decreasing liquidity
The balance sheet lists current assets first (most liquid), followed by long-term (non-current) assets in order of decreasing liquidity, such as property, plant, and equipment.
Question 7: Which method of depreciation results in the highest depreciation expense in the early years of an asset's life?
- Straight-line depreciation
- Units-of-production depreciation
- Double-declining balance depreciation (Correct answer)
- Sum-of-the-years'-digits only for intangibles
Correct answer: Double-declining balance depreciation
Double-declining balance is an accelerated depreciation method that front-loads depreciation expense, resulting in higher expense in earlier years and lower expense later.
IBA Accounting Fundamentals 2
The going concern assumption in accounting means: