1|Page | © copyright 2024/2025 | Grade A+
Federal Tax Accounting Questions
and Answers Grade A+
Which of the following are Correct when defining the gross income of a
business?
✓ *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?
✓ *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.
Master01 | October, 2024/2025 | Latest update
, 1|Page | © copyright 2024/2025 | Grade A+
✓ *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?
✓ *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.
✓ * uniform cost capitalization
Which of the following methods are the primary inventory cost-flow methods
used for tax purposes?
✓ *First in first out (FIFO)
✓ *Last in first out (LIFO)
✓ *Specific identification method
Master01 | October, 2024/2025 | Latest update
, 1|Page | © copyright 2024/2025 | Grade A+
Which of the following statements are Correct regarding inventory
capitalization rules?
✓ * 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.
✓ * 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.
✓ *all-event
✓ *amount
Master01 | October, 2024/2025 | Latest update
, 1|Page | © copyright 2024/2025 | Grade A+
The ___________ __________ test specifies that businesses may NOT recognize a
deduction for an expense until the underlying activity generating the
associated liability has occurred.
✓ *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.
✓ *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?
✓ * $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
Master01 | October, 2024/2025 | Latest update
Federal Tax Accounting Questions
and Answers Grade A+
Which of the following are Correct when defining the gross income of a
business?
✓ *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?
✓ *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.
Master01 | October, 2024/2025 | Latest update
, 1|Page | © copyright 2024/2025 | Grade A+
✓ *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?
✓ *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.
✓ * uniform cost capitalization
Which of the following methods are the primary inventory cost-flow methods
used for tax purposes?
✓ *First in first out (FIFO)
✓ *Last in first out (LIFO)
✓ *Specific identification method
Master01 | October, 2024/2025 | Latest update
, 1|Page | © copyright 2024/2025 | Grade A+
Which of the following statements are Correct regarding inventory
capitalization rules?
✓ * 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.
✓ * 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.
✓ *all-event
✓ *amount
Master01 | October, 2024/2025 | Latest update
, 1|Page | © copyright 2024/2025 | Grade A+
The ___________ __________ test specifies that businesses may NOT recognize a
deduction for an expense until the underlying activity generating the
associated liability has occurred.
✓ *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.
✓ *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?
✓ * $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
Master01 | October, 2024/2025 | Latest update
