Canadian Securities Course (CSC) Level 1 Practice Exam

What is amortization?

1. The appreciation of an asset over time

2. The process of converting assets into cash

3. The gradual writing off of intangible assets

4. The revaluation of assets

The correct answer is: The gradual writing off of intangible assets

Amortization refers specifically to the gradual writing off of intangible assets, which involves systematically reducing the book value of these assets over time. This is typically done in accordance with a set schedule, often based on the expected useful life of the asset. Intangible assets may include items such as patents, trademarks, and copyrights, which do not have a physical presence but still provide economic value. The process of amortization serves to match the cost of the intangible asset to the revenue it helps generate, ensuring accurate financial reporting and reflecting the asset's consumption or reduction in value over time. As a result, businesses will often include amortization expenses in their income statements, which can affect overall profitability and tax liability. In contrast, appreciation refers to the increase in value of an asset over time, while converting assets into cash can involve selling or liquidating the assets, which is different from amortization. Revaluation of assets typically refers to adjusting the carrying amount of a fixed asset to its current market value, a process distinct from amortization that does not involve the systematic write-off of an asset's value over time.