CBA CBA Tax Planning & Accounting Fundamentals 2 — Questions and Answers
Question 1: The 'current ratio' is calculated as current assets divided by current liabilities and is used to measure a company's:
- Long-term solvency and debt capacity
- Short-term liquidity and ability to meet near-term obligations (Correct answer)
- Overall profitability relative to total assets
- Efficiency in collecting accounts receivable
Correct answer: Short-term liquidity and ability to meet near-term obligations
The current ratio measures short-term liquidity, indicating whether a business has sufficient current assets to cover its current liabilities coming due within one year.
Question 2: Which depreciation method allocates an equal amount of an asset's cost to each year of its useful life?
- Double declining balance
- Sum-of-the-years' digits
- Units of production
- Straight-line depreciation (Correct answer)
Correct answer: Straight-line depreciation
Straight-line depreciation divides the asset's depreciable cost equally over its estimated useful life, resulting in the same depreciation expense each period.
Question 3: A business advisor recommends a client establish an accountable plan for employee expense reimbursements primarily to:
- Maximize the company's gross revenue reported to the IRS
- Ensure reimbursements are tax-free to employees and deductible to the employer (Correct answer)
- Qualify the business for R&D tax credits
- Avoid state sales tax on business purchases
Correct answer: Ensure reimbursements are tax-free to employees and deductible to the employer
An IRS accountable plan requires adequate accounting of expenses and return of excess advances, making qualifying reimbursements excludable from employee income and deductible by the employer.
Question 4: EBITDA is a financial metric that stands for earnings before interest, taxes, depreciation, and amortization, and is commonly used to assess a business's:
- Net worth and equity position
- Operational cash flow and core profitability (Correct answer)
- Total debt load relative to equity
- Working capital sufficiency
Correct answer: Operational cash flow and core profitability
EBITDA strips out non-operating factors (interest, taxes) and non-cash charges (depreciation, amortization) to provide a cleaner view of a business's underlying operational performance.
Question 5: When advising a client on the tax treatment of startup costs, a CBA should know that the IRS allows businesses to deduct up to how much in startup costs in the year a business begins?
- $2,500
- $5,000 (Correct answer)
- $10,000
- $25,000
Correct answer: $5,000
Under IRC Section 195, businesses may deduct up to $5,000 in startup costs in the first year, with the remainder amortized over 180 months, subject to phase-out if total startup costs exceed $50,000.
Question 6: Which inventory costing method assumes that the most recently purchased items are the first ones sold, often resulting in lower taxable income during periods of rising prices?
- FIFO (First-In, First-Out)
- Weighted average cost
- LIFO (Last-In, First-Out) (Correct answer)
- Specific identification
Correct answer: LIFO (Last-In, First-Out)
LIFO matches the most recent (higher) costs against current revenues, producing higher cost of goods sold and lower taxable income when prices are rising, though it is not permitted under IFRS.
CBA CBA Tax Planning & Accounting Fundamentals 2
The 'current ratio' is calculated as current assets divided by current liabilities and is used to measure a company's: