H&R BLOCK EXAMS KEY CONCEPTS AND
PRACTICE QUESTIONS
◉ Schedule C, Line F asks for the accounting method used in the
business.
What is the difference between the cash method and the accrual
method of accounting?
Answer: • Under the accrual method, total sales and total charges for
services are included in income even though payment may be
received in another tax year.
• Under the cash method, only income actually received or expenses
actually paid during the year are included. (15.5)
◉ What does it mean if a proprietor "materially participates" in the
business?
Answer: He is active in running the business in a substantial way on
a day-to-day basis. (15.5)
◉ Why is it important to know whether or not the proprietor
materially participates?
Answer: If the proprietor does not materially participate, any loss
from the business is a passive loss and generally may be currently
deducted only against passive income. (15.6)
,◉ What are returns and allowances?
Answer: • Amounts that were refunded to customers who returned
merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
◉ How is cost of goods sold determined?
Answer: Beginning inventory plus purchases, plus labor, supplies,
depreciation, etc. attributable to product manufacture or
preparation for sale, minus ending inventory. (15.7)
◉ If the client has contract labor, what should you remind the client
that they should do?
Answer: • Provide a Form 1099-MISC to any independent contractor
who worked and earned $600 or more. (15.9)
◉ What is the purpose of self-employment tax?
Answer: To pay social security and medicare taxes. (15.14)
◉ What amounts does a proprietor have "at risk"?
Answer: Amounts invested in the business plus any business debts
for which the proprietor is personally liable. (15.16)
, ◉ What difference does it make if the proprietor is "at risk" or not?
Answer: Only amounts at risk may be used to determine the actual
loss on Schedule C. (15.16)
◉ How does a Tax Professional meet due diligence requirements?
Answer: • Tax Professionals fulfill due diligence requirements by
making every effort to prepare accurate and complete returns.
• Tax Professionals must have knowledge of tax law, and apply a
reasonability check to the information provided by their clients.
(26.1)
◉ What is a thorough interview?
Answer: A thorough interview consists of asking general
information questions, then asking additional questions whenever
information is incomplete or seems inaccurate or inconsistent.
(26.2)
◉ What is a conflict of interest?
Answer: A conflict of interest is when one's situation might benefit
at the expense of another's situation. (26.3)
◉ What actions can resolve a conflict of interest?
PRACTICE QUESTIONS
◉ Schedule C, Line F asks for the accounting method used in the
business.
What is the difference between the cash method and the accrual
method of accounting?
Answer: • Under the accrual method, total sales and total charges for
services are included in income even though payment may be
received in another tax year.
• Under the cash method, only income actually received or expenses
actually paid during the year are included. (15.5)
◉ What does it mean if a proprietor "materially participates" in the
business?
Answer: He is active in running the business in a substantial way on
a day-to-day basis. (15.5)
◉ Why is it important to know whether or not the proprietor
materially participates?
Answer: If the proprietor does not materially participate, any loss
from the business is a passive loss and generally may be currently
deducted only against passive income. (15.6)
,◉ What are returns and allowances?
Answer: • Amounts that were refunded to customers who returned
merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
◉ How is cost of goods sold determined?
Answer: Beginning inventory plus purchases, plus labor, supplies,
depreciation, etc. attributable to product manufacture or
preparation for sale, minus ending inventory. (15.7)
◉ If the client has contract labor, what should you remind the client
that they should do?
Answer: • Provide a Form 1099-MISC to any independent contractor
who worked and earned $600 or more. (15.9)
◉ What is the purpose of self-employment tax?
Answer: To pay social security and medicare taxes. (15.14)
◉ What amounts does a proprietor have "at risk"?
Answer: Amounts invested in the business plus any business debts
for which the proprietor is personally liable. (15.16)
, ◉ What difference does it make if the proprietor is "at risk" or not?
Answer: Only amounts at risk may be used to determine the actual
loss on Schedule C. (15.16)
◉ How does a Tax Professional meet due diligence requirements?
Answer: • Tax Professionals fulfill due diligence requirements by
making every effort to prepare accurate and complete returns.
• Tax Professionals must have knowledge of tax law, and apply a
reasonability check to the information provided by their clients.
(26.1)
◉ What is a thorough interview?
Answer: A thorough interview consists of asking general
information questions, then asking additional questions whenever
information is incomplete or seems inaccurate or inconsistent.
(26.2)
◉ What is a conflict of interest?
Answer: A conflict of interest is when one's situation might benefit
at the expense of another's situation. (26.3)
◉ What actions can resolve a conflict of interest?
