Tax exam 2 prep questions n correct
answers rated A+ 2025/2026
which of the following methods are the primary inventory cost flow methods used for tax
purposes? - ANS ✔✔LIFO, FIFO, specific identification
T/F An accrual method business receiving an advance payment for goods is will provide to
customers in the future must account for the prepayment for tax purposes under the deferral
method, meaning that the income recognition is deferred until the period the goods are
delivered/ - ANS ✔✔False
Despite the use of the accrual method, prepaid .... and prepaid ... are taxed immediately upon
receipt. - ANS ✔✔rent, interest
which of the following statements is correct regarding the recognition of the cumulative
difference in taxable income due to a change in accounting method? - ANS ✔✔1. if the
adjustment decreases taxable income, it is recognized-in its entirety in the year of the change.
2. if the adjustment increases taxable income , it is recognized over 4 years by adding 25% of the
increase each year
When is a business expense deemed to be reasonable in amount? - ANS ✔✔when it is not
extravagant
The tax laws do not allow an ... method business to deduct accrued expenses for a liability owed
to a related party using the ... method until the related party recognizes the related income
from the transaction - ANS ✔✔accrual, cash
Sonny incurred the following expenses last month: Khaki pants and a blue button down shirt to
wear to work, tuition for a course in marketing to improve his current job skills as a fashion
,designer, and groceries so that he could take his lunch to work. Which of these expenses is/are
deductible business expenses? - ANS ✔✔tuition for the marketing course
A business may have a tax year that is shorter than a full 12 months during its ... year in the
business or its ... year in business. - ANS ✔✔first, last
Which of the following choices are tests that need to be met in order to deduct an expense
under the accrual method? - ANS ✔✔all events test, economic performance test
In the year that a business changes is 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 income, the taxpayer
includes ... of the deduction in the current year// - ANS ✔✔cumulative, 25%, 100%
For accrual method businesses, bad debt expense is recognized using the ... method for
financial accounting and is deducted using the ..... method for tax purposes. - ANS
✔✔allowance, direct write off
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? - ANS ✔✔1. primary business activity must
be to provide services to customers with sales of products being a secondary source of income
2.annual gross receipts for the three year period prior to the current year do not exceed 10
million
when is business deemed to have adopted an impermissible accounting period? - ANS ✔✔after
it has used the method for two consecutive year
the ... ... ... deduction is designed to reduce the tax burden on domestic manufacturers to make
investments in domestic manufacturing facilities more attractive - ANS ✔✔domestic production
activities
, How is it possible that a taxpayer could report revenue from a hobby without getting any tax
benefit from the expenses incurred in the hobby? - ANS ✔✔1. the taxpayers uses the standard
deduction rather than itemizing deductions
2.the expenses are NOT high enough to exceed the 2 % of AGI floor needed for miscellaneous
itemized deduction
the all events test generally requires businesses receiving advance payments for services to
recognize the income when they receive the payment rather than when they perform the
service. Which of the following statements in INCORRECT Regarding this rule? - ANS ✔✔the tax
authorities give the business the option to report the income in the current year or defer it to
the period in which the revenue is earned
in addition to the all events test, an accrual basis business must meet an ... .. test with respect
to a liability before the corresponding expense can be deducted for tax purposes - ANS
✔✔economic performance
when a business wants to change an accounting method for tax reporting, such as the cost-flow
method used for inventory, what body must give permission for the change? - ANS ✔✔internal
revenue service
the objective of business activities is to make a .... when a taxpayer's activity is pursued for
personal pleasure, that activity is treated as a ... when revenues and expenses are incurred -
ANS ✔✔profit, hobby
which of the following statements are Correct when requesting permission to change
accounting methods? - ANS ✔✔the business may have to pay a fee and provide a good business
reason for making the change.
2.the IRS automatically approves certain type of accounting method changes
answers rated A+ 2025/2026
which of the following methods are the primary inventory cost flow methods used for tax
purposes? - ANS ✔✔LIFO, FIFO, specific identification
T/F An accrual method business receiving an advance payment for goods is will provide to
customers in the future must account for the prepayment for tax purposes under the deferral
method, meaning that the income recognition is deferred until the period the goods are
delivered/ - ANS ✔✔False
Despite the use of the accrual method, prepaid .... and prepaid ... are taxed immediately upon
receipt. - ANS ✔✔rent, interest
which of the following statements is correct regarding the recognition of the cumulative
difference in taxable income due to a change in accounting method? - ANS ✔✔1. if the
adjustment decreases taxable income, it is recognized-in its entirety in the year of the change.
2. if the adjustment increases taxable income , it is recognized over 4 years by adding 25% of the
increase each year
When is a business expense deemed to be reasonable in amount? - ANS ✔✔when it is not
extravagant
The tax laws do not allow an ... method business to deduct accrued expenses for a liability owed
to a related party using the ... method until the related party recognizes the related income
from the transaction - ANS ✔✔accrual, cash
Sonny incurred the following expenses last month: Khaki pants and a blue button down shirt to
wear to work, tuition for a course in marketing to improve his current job skills as a fashion
,designer, and groceries so that he could take his lunch to work. Which of these expenses is/are
deductible business expenses? - ANS ✔✔tuition for the marketing course
A business may have a tax year that is shorter than a full 12 months during its ... year in the
business or its ... year in business. - ANS ✔✔first, last
Which of the following choices are tests that need to be met in order to deduct an expense
under the accrual method? - ANS ✔✔all events test, economic performance test
In the year that a business changes is 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 income, the taxpayer
includes ... of the deduction in the current year// - ANS ✔✔cumulative, 25%, 100%
For accrual method businesses, bad debt expense is recognized using the ... method for
financial accounting and is deducted using the ..... method for tax purposes. - ANS
✔✔allowance, direct write off
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? - ANS ✔✔1. primary business activity must
be to provide services to customers with sales of products being a secondary source of income
2.annual gross receipts for the three year period prior to the current year do not exceed 10
million
when is business deemed to have adopted an impermissible accounting period? - ANS ✔✔after
it has used the method for two consecutive year
the ... ... ... deduction is designed to reduce the tax burden on domestic manufacturers to make
investments in domestic manufacturing facilities more attractive - ANS ✔✔domestic production
activities
, How is it possible that a taxpayer could report revenue from a hobby without getting any tax
benefit from the expenses incurred in the hobby? - ANS ✔✔1. the taxpayers uses the standard
deduction rather than itemizing deductions
2.the expenses are NOT high enough to exceed the 2 % of AGI floor needed for miscellaneous
itemized deduction
the all events test generally requires businesses receiving advance payments for services to
recognize the income when they receive the payment rather than when they perform the
service. Which of the following statements in INCORRECT Regarding this rule? - ANS ✔✔the tax
authorities give the business the option to report the income in the current year or defer it to
the period in which the revenue is earned
in addition to the all events test, an accrual basis business must meet an ... .. test with respect
to a liability before the corresponding expense can be deducted for tax purposes - ANS
✔✔economic performance
when a business wants to change an accounting method for tax reporting, such as the cost-flow
method used for inventory, what body must give permission for the change? - ANS ✔✔internal
revenue service
the objective of business activities is to make a .... when a taxpayer's activity is pursued for
personal pleasure, that activity is treated as a ... when revenues and expenses are incurred -
ANS ✔✔profit, hobby
which of the following statements are Correct when requesting permission to change
accounting methods? - ANS ✔✔the business may have to pay a fee and provide a good business
reason for making the change.
2.the IRS automatically approves certain type of accounting method changes
