Historical Cost and Depreciation Quiz

What does the historical cost principle dictate regarding the recording of non-current assets?

• Assets should be recorded at their fair market value.

• Assets should be recorded at their historical cost.

• Assets should be recorded at their replacement cost.

• Assets should be recorded at their depreciated value.

Which of the following is included in the historical cost of an asset?

• Only the purchase price.

• Purchase price and costs necessary to get the asset ready for use.

• Only the costs necessary to get the asset ready for use.

• The estimated future value of the asset.

What type of account is accumulated depreciation?

• Asset account.

• Liability account.

• Contra-asset account.

• Equity account.

How does accumulated depreciation affect the value of non-current assets on the balance sheet?

• It increases the value of non-current assets.

• It has no effect on the value of non-current assets.

• It decreases the value of non-current assets.

• It doubles the value of non-current assets.

Why is historical cost considered objective and verifiable?

• Because it is based on market estimates.

• Because it is based on subjective management estimates.

• Because it is based on actual transaction costs.

• Because it is based on future projections.

What does accumulated depreciation represent?

• The total amount of depreciation expense recorded over the asset's useful life.

• The future value of the asset.

• The original purchase price of the asset.

• The market value of the asset.

Which of the following best describes the purpose of depreciation?

• To increase the asset's value over time.

• To allocate the cost of an asset over its useful life.

• To estimate the future value of an asset.

• To record the asset at its market value.

In which financial statement is accumulated depreciation typically reported?

• Income statement.

• Statement of cash flows.

• Balance sheet.

• Statement of changes in equity.

What is the effect of recording depreciation expense on the income statement?

• It increases net income.

• It decreases net income.

• It has no effect on net income.

• It doubles net income.

Which of the following is NOT a characteristic of the historical cost principle?

• It is objective.

• It is verifiable.

• It is based on future market values.

• It is free from management's subjective estimates.