Future Business Leaders of America (FBLA) Accounting Practice Test

What is the purpose of amortization?

1. To increase the value of an asset

2. To spread the cost of an intangible asset over its useful life

3. To calculate future cash flows

4. To determine the resale value of an asset

The correct answer is: To spread the cost of an intangible asset over its useful life

The purpose of amortization is to spread the cost of an intangible asset over its useful life, which aligns perfectly with the chosen answer. Amortization is a systematic approach to allocating the initial cost of intangible assets—such as patents, copyrights, and trademarks—over time. This method matches the expense of using the asset with the revenue it generates, leading to a more accurate representation of a company's financial performance. By doing so, companies can ensure that their financial statements reflect the ongoing utility and contribution of those intangible assets to operations. This process helps in maintaining an accurate portrayal of net income and expenses, which is critical for stakeholders making economic decisions based on the financial statements. The other options, while related to asset management and finance, do not accurately define the primary function of amortization. For instance, increasing the value of an asset is not the aim of amortization; rather, it aims to capture costs in a manageable way. Similarly, calculating future cash flows and determining resale values pertain to different accounting or financial analysis processes and do not relate to the systematic allocation of intangible assets' costs over time.