Depreciation, Provisions & Reserves

What is the central idea of the chapter "Depreciation, Provisions & Reserves"?

1. Fixed assets never lose value.
2. Depreciation allocates the cost of fixed assets over their useful life, provisions are created for anticipated liabilities or losses, and reserves are appropriations of profits retained to strengthen the financial position and support future business needs.
3. Provisions and reserves are identical.
4. Depreciation is optional for businesses.

Why is depreciation considered an expense?

1. Because it increases the value of assets
2. Because it represents the portion of an asset's cost consumed during the accounting period
3. Because it is paid to creditors
4. Because it creates a reserve

Which of the following is NOT a reserve?

1. General Reserve
2. Capital Reserve
3. Revenue Reserve
4. Provision for Taxation

Depreciation is charged mainly because fixed assets:

1. Increase in value every year
2. Lose value during their useful life
3. Are sold every year
4. Earn interest

Which reserve is created out of capital profits?

1. Revenue Reserve
2. Capital Reserve
3. General Reserve
4. Secret Reserve

Which accounting concept supports creating provisions for expected losses?

1. Prudence Concept
2. Cost Concept
3. Business Entity Concept
4. Realization Concept

What is a reserve?

1. An expected liability
2. Part of profits retained for future use
3. Annual depreciation expense
4. Cash kept in the bank

Which of the following is an example of a provision?

1. General Reserve
2. Capital Reserve
3. Provision for Doubtful Debts
4. Dividend Reserve

A provision is created to:

1. Increase owner's capital
2. Meet anticipated losses or liabilities
3. Increase sales revenue
4. Purchase fixed assets

What is residual value?

1. Cost of purchasing the asset
2. Estimated value of the asset at the end of its useful life
3. Total depreciation charged
4. Annual repair cost

Under the Written Down Value (WDV) Method, depreciation is calculated on:

1. Original cost every year
2. Book value of the asset each year
3. Market value only
4. Residual value only

Which method charges an equal amount of depreciation every year?

1. Written Down Value Method
2. Straight Line Method
3. Revaluation Method
4. Annuity Method

Which accounting principle supports charging depreciation every year?

1. Money Measurement Concept
2. Matching Concept
3. Business Entity Concept
4. Going Concern Concept

Which of the following is NOT a cause of depreciation?

1. Wear and tear
2. Obsolescence
3. Appreciation due to rising market demand
4. Passage of time

What is depreciation?

1. Increase in the value of an asset over time
2. Gradual decrease in the value of a fixed asset due to use, wear and tear, or obsolescence
3. Profit earned from the sale of assets
4. Amount invested by the owner