Assets Classification Quiz

12 Questions

Which of the following is an example of a non-current asset?

Land

What is the other name for non-current assets?

Long-term assets

Which of the following is typically classified as a current asset?

Inventory

How are current assets different from non-current assets?

Current assets are expected to be used or converted into cash within a year, while non-current assets are not.

Which of the following is a characteristic of Property, Plant, and Equipment (PPE)?

They are depreciated over their useful lives.

What is depreciation in accounting?

Decrease in asset value over time

Which factor affects the calculation of depreciation?

Useful life

How is the annual depreciation expense calculated under the straight-line method?

By dividing the cost of the asset by its useful life

Which method of depreciation results in higher early years depreciation?

Reducing balance method

What does the salvage value of an asset represent?

The amount the asset can be sold for at the end of its useful life

Why do companies use depreciation?

To reduce taxable income

Which financial metric is directly affected by the depreciation method used?

Return on assets

Study Notes

Asset Classification

Non-current assets, also known as long-term assets, include land, as it is not expected to be used or converted into cash within a year.
Current assets, on the other hand, are expected to be used or converted into cash within a year and include inventory, cash, and accounts receivable.

Property, Plant, and Equipment (PPE)

PPE are tangible assets, such as equipment, buildings, and land, that are used in business operations and are depreciated over their useful lives.
They are not held for resale and are not intangible assets.
They are classified as non-current assets.

Depreciation

Depreciation is the decrease in asset value over time, representing the allocation of the asset's cost to the periods in which it is used.
Depreciation expense is reported on the income statement.
Factors that affect the calculation of depreciation include the cost of the asset, salvage value, and useful life, but not market demand.

Depreciation Methods

The straight-line method calculates annual depreciation expense by dividing the cost of the asset by its useful life.
The double-declining balance method results in a higher depreciation expense in the early years of an asset's life.
The units-of-production method and sum-of-the-years'-digits method are other methods of depreciation.

Salvage Value

The salvage value of an asset represents the amount the asset can be sold for at the end of its useful life.

Purpose of Depreciation

Companies use depreciation to match the cost of an asset with the revenue generated by the asset, thereby reducing taxable income.
Depreciation does not directly affect the gross profit margin.

Financial Metrics

The depreciation method used can affect net income, return on assets, and earnings per share, but not gross profit margin.