HRB 27 FINAL EXAM
REVIEW
1.
What income reporting form should an independent contractor sometimes receive from the
person who paid them?
A) Form W-2
B) Form 1040
C) Form 1099-MISC ✅
D) Schedule C
2.
What is the difference between the cash method and the accrual method of accounting?
A) Accrual includes expenses only, cash includes revenue only
B) Cash method includes income received and expenses paid; accrual includes income and
expenses when earned or incurred ✅
C) Both methods are identical
D) Accrual is used only for individuals
3.
What does it mean if a proprietor “materially participates” in the business?
A) They fund the business
B) They hire the employees
C) They manage daily operations in a substantial way ✅
D) They outsource their work
4.
,Why is it important to know if the proprietor materially participates?
A) It determines business structure
B) It affects eligibility for retirement plans
C) It determines if losses are passive or non-passive ✅
D) It affects sales tax rates
5.
What are returns and allowances?
A) State taxes owed
B) Employee payroll expenses
C) Refunds given to customers for returned merchandise ✅
D) Tax credits from previous years
6.
How is cost of goods sold determined?
A) Purchases minus sales
B) Ending inventory minus expenses
C) Beginning inventory + purchases + costs - ending inventory ✅
D) Gross income divided by labor cost
7.
If the client has contract labor, what should you remind them to do?
A) File Form W-4
B) Pay quarterly taxes
C) Issue Form 1099-MISC to contractors paid $600 or more ✅
D) Withhold payroll taxes
8.
What is the purpose of the self-employment tax?
A) Pay for business licenses
B) Pay Medicare and Social Security taxes ✅
C) Pay state income tax
D) Cover unemployment insurance
, 9.
What amounts does a proprietor have “at risk”?
A) Their net profit
B) Business loans only
C) Investments and personally liable debts ✅
D) Tax-deductible expenses
10.
Why does it matter if the proprietor is “at risk”?
A) It impacts insurance coverage
B) It determines if losses can offset other income ✅
C) It allows tax deferral
D) It requires a CPA’s review
11.
How does a Tax Professional meet due diligence requirements?
A) By following the client’s instructions
B) By relying solely on software
C) By preparing accurate returns and applying reasonable checks ✅
D) By charging high fees
12.
What is a thorough interview?
A) Only confirming prior return information
B) Asking general questions without follow-up
C) Asking questions and following up on inconsistencies ✅
D) Having the client fill out a form alone
13.
What is a conflict of interest?
A) Filing taxes for a minor
REVIEW
1.
What income reporting form should an independent contractor sometimes receive from the
person who paid them?
A) Form W-2
B) Form 1040
C) Form 1099-MISC ✅
D) Schedule C
2.
What is the difference between the cash method and the accrual method of accounting?
A) Accrual includes expenses only, cash includes revenue only
B) Cash method includes income received and expenses paid; accrual includes income and
expenses when earned or incurred ✅
C) Both methods are identical
D) Accrual is used only for individuals
3.
What does it mean if a proprietor “materially participates” in the business?
A) They fund the business
B) They hire the employees
C) They manage daily operations in a substantial way ✅
D) They outsource their work
4.
,Why is it important to know if the proprietor materially participates?
A) It determines business structure
B) It affects eligibility for retirement plans
C) It determines if losses are passive or non-passive ✅
D) It affects sales tax rates
5.
What are returns and allowances?
A) State taxes owed
B) Employee payroll expenses
C) Refunds given to customers for returned merchandise ✅
D) Tax credits from previous years
6.
How is cost of goods sold determined?
A) Purchases minus sales
B) Ending inventory minus expenses
C) Beginning inventory + purchases + costs - ending inventory ✅
D) Gross income divided by labor cost
7.
If the client has contract labor, what should you remind them to do?
A) File Form W-4
B) Pay quarterly taxes
C) Issue Form 1099-MISC to contractors paid $600 or more ✅
D) Withhold payroll taxes
8.
What is the purpose of the self-employment tax?
A) Pay for business licenses
B) Pay Medicare and Social Security taxes ✅
C) Pay state income tax
D) Cover unemployment insurance
, 9.
What amounts does a proprietor have “at risk”?
A) Their net profit
B) Business loans only
C) Investments and personally liable debts ✅
D) Tax-deductible expenses
10.
Why does it matter if the proprietor is “at risk”?
A) It impacts insurance coverage
B) It determines if losses can offset other income ✅
C) It allows tax deferral
D) It requires a CPA’s review
11.
How does a Tax Professional meet due diligence requirements?
A) By following the client’s instructions
B) By relying solely on software
C) By preparing accurate returns and applying reasonable checks ✅
D) By charging high fees
12.
What is a thorough interview?
A) Only confirming prior return information
B) Asking general questions without follow-up
C) Asking questions and following up on inconsistencies ✅
D) Having the client fill out a form alone
13.
What is a conflict of interest?
A) Filing taxes for a minor
