Federal Tax Accounting UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Which of the following are Correct when defining the gross income of a business? - CORRECT
ANSWER - *Revenues from renting property is included in gross profit for rental businesses.
*Gross income for a service business can be calculated as income from services provided.
*Gross income from a business includes gross profit from inventory sales.
Which of the following choices constitutes gross income from a business? - CORRECT
ANSWER - *Income from services provided.
*Gross profit from inventory sales.
*Income from renting property.
Businesses that generate a material portion of their income by selling products they acquire for
resale or products they manufacture generally must account for gross profit using the
______________ method, regardless of the method used for tax reporting. - CORRECT
ANSWER - *Accruel
Which of the following conditions must be met for a cash-method business to possibly be able to
use the cash method to account for gross profit? - CORRECT ANSWER - *Annual gross
receipts for the three-year period prior to the current year do not exceed $10 million.
*Primary business activity must be to provide services to customers with sales of products being
a secondary source of income.
In addition to finished goods, under the ____________ ________________ ________________
rules, inventory cost includes the purchase price of any aw materials shipping costs, and any
indirect costs the business allocates to inventory. - CORRECT ANSWER - * uniform cost
capitalization
Which of the following methods are the primary inventory cost-flow methods used for tax
purposes? - CORRECT ANSWER - *First in first out (FIFO)
,*Last in first out (LIFO)
*Specific identification method
Which of the following statements are Correct regarding inventory capitalization rules? -
CORRECT ANSWER - * Under UNICAP, businesses generally capitalize the inventory costs
in one.
* UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than
they do for financial reporting.
* Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to
employees in production supporting departments.
In addition to the all-events test, an accrual-basis business must meet ____________
____________ test with respect to a liability before the corresponding expense can be deducted
for tax purposes. - CORRECT ANSWER - * economic performance
In order to meet the __________ _________ test for deducting an expense, everything necessary
to establish the liability giving rise to the deduction must have occurred, and the business must
be able to determine the ____________ of the liability with reasonable accuracy. - CORRECT
ANSWER - *all-event
*amount
The ___________ __________ test specifies that businesses may NOT recognize a deduction for
an expense until the underlying activity generating the associated liability has occurred. -
CORRECT ANSWER - *economic performance
For accrual-method businesses, bad debt expense is recognized using the ____________ method
for financial accounting and is deducted using the _______________ method for tax purposes. -
CORRECT ANSWER - *allowance
*direct write-off
Montgomery & Co are accounting for their bad debts. The company uses the accrual method of
accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated
bad debts for the period is $2,000 using the allowance method of accounting for noncollectable
, accounts. The amount of accounts actually written off during the period is $1700. What is the
amount of bad debt expense that can be deducted for tax purposes? - CORRECT ANSWER -
* $1700-M&C must use the direct write-off method for tax purposes
Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis
sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete
a construction project. At the end of the year, Josh owed Michael $700 for worked performed
during December. Josh paid Michael the $700 on January 2nd. When will Josh be able to deduct
the wage expense and when will Michael have to include the $700 in gross income? -
CORRECT ANSWER - * Josh must wait to deduct the expense until Michael includes it in
gross income. Michael will include the $700 in the year he receives it.
The _____________ -method of tax reporting provides a better matching of revenues and
expenses. - CORRECT ANSWER - *accrual method
For tax purposes, when a business wants to adopt a new accounting method, it must get
permission from the IRS - CORRECT ANSWER - True
A business is deemed to have adopted a permissible accounting method if it has used the method
for __________ year(s). It is deemed to have adopted an impermissible accounting method if it
has used the method for ____________ consecutive years. - CORRECT ANSWER - *one
*two
Which of the following statements is correct regarding the recognition of the cumulative
difference in taxable income due to a change in accounting methods. - CORRECT ANSWER -
*If the adjustment decreases taxable income, it is recognized in its entirety in the year of the
change.
*If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the
increase each year.
In the year that a business changes its accounting method, it must make an adjustment to taxable
income that represents the ________________ difference for the amount that would have been
taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer
includes _________% of the addition in the current year. If the adjustment decreases taxable
ACTUAL Exam Questions and CORRECT
Answers
Which of the following are Correct when defining the gross income of a business? - CORRECT
ANSWER - *Revenues from renting property is included in gross profit for rental businesses.
*Gross income for a service business can be calculated as income from services provided.
*Gross income from a business includes gross profit from inventory sales.
Which of the following choices constitutes gross income from a business? - CORRECT
ANSWER - *Income from services provided.
*Gross profit from inventory sales.
*Income from renting property.
Businesses that generate a material portion of their income by selling products they acquire for
resale or products they manufacture generally must account for gross profit using the
______________ method, regardless of the method used for tax reporting. - CORRECT
ANSWER - *Accruel
Which of the following conditions must be met for a cash-method business to possibly be able to
use the cash method to account for gross profit? - CORRECT ANSWER - *Annual gross
receipts for the three-year period prior to the current year do not exceed $10 million.
*Primary business activity must be to provide services to customers with sales of products being
a secondary source of income.
In addition to finished goods, under the ____________ ________________ ________________
rules, inventory cost includes the purchase price of any aw materials shipping costs, and any
indirect costs the business allocates to inventory. - CORRECT ANSWER - * uniform cost
capitalization
Which of the following methods are the primary inventory cost-flow methods used for tax
purposes? - CORRECT ANSWER - *First in first out (FIFO)
,*Last in first out (LIFO)
*Specific identification method
Which of the following statements are Correct regarding inventory capitalization rules? -
CORRECT ANSWER - * Under UNICAP, businesses generally capitalize the inventory costs
in one.
* UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than
they do for financial reporting.
* Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to
employees in production supporting departments.
In addition to the all-events test, an accrual-basis business must meet ____________
____________ test with respect to a liability before the corresponding expense can be deducted
for tax purposes. - CORRECT ANSWER - * economic performance
In order to meet the __________ _________ test for deducting an expense, everything necessary
to establish the liability giving rise to the deduction must have occurred, and the business must
be able to determine the ____________ of the liability with reasonable accuracy. - CORRECT
ANSWER - *all-event
*amount
The ___________ __________ test specifies that businesses may NOT recognize a deduction for
an expense until the underlying activity generating the associated liability has occurred. -
CORRECT ANSWER - *economic performance
For accrual-method businesses, bad debt expense is recognized using the ____________ method
for financial accounting and is deducted using the _______________ method for tax purposes. -
CORRECT ANSWER - *allowance
*direct write-off
Montgomery & Co are accounting for their bad debts. The company uses the accrual method of
accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated
bad debts for the period is $2,000 using the allowance method of accounting for noncollectable
, accounts. The amount of accounts actually written off during the period is $1700. What is the
amount of bad debt expense that can be deducted for tax purposes? - CORRECT ANSWER -
* $1700-M&C must use the direct write-off method for tax purposes
Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis
sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete
a construction project. At the end of the year, Josh owed Michael $700 for worked performed
during December. Josh paid Michael the $700 on January 2nd. When will Josh be able to deduct
the wage expense and when will Michael have to include the $700 in gross income? -
CORRECT ANSWER - * Josh must wait to deduct the expense until Michael includes it in
gross income. Michael will include the $700 in the year he receives it.
The _____________ -method of tax reporting provides a better matching of revenues and
expenses. - CORRECT ANSWER - *accrual method
For tax purposes, when a business wants to adopt a new accounting method, it must get
permission from the IRS - CORRECT ANSWER - True
A business is deemed to have adopted a permissible accounting method if it has used the method
for __________ year(s). It is deemed to have adopted an impermissible accounting method if it
has used the method for ____________ consecutive years. - CORRECT ANSWER - *one
*two
Which of the following statements is correct regarding the recognition of the cumulative
difference in taxable income due to a change in accounting methods. - CORRECT ANSWER -
*If the adjustment decreases taxable income, it is recognized in its entirety in the year of the
change.
*If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the
increase each year.
In the year that a business changes its accounting method, it must make an adjustment to taxable
income that represents the ________________ difference for the amount that would have been
taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer
includes _________% of the addition in the current year. If the adjustment decreases taxable
