CIMA Business Law and Taxation 2 — Questions and Answers
Question 1: Under US tax law, what is the 'matching principle' in the context of corporate taxation?
- Income and related expenses should be recognized in the same period (Correct answer)
- Tax payments must match the prior year's liability
- Assets and liabilities must be equal on the balance sheet
- Revenue recognition must match industry standards
Correct answer: Income and related expenses should be recognized in the same period
The matching principle requires that income and the expenses incurred to generate it be recognized in the same accounting period for accurate profit measurement.
Question 2: Which US federal law governs employer-employee relationships and sets minimum wage and overtime requirements?
- The Equal Employment Opportunity Act
- The Fair Labor Standards Act (FLSA) (Correct answer)
- The National Labor Relations Act
- The Occupational Safety and Health Act
Correct answer: The Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards for most US employees.
Question 3: In US business taxation, what is a 'tax credit' as distinct from a 'tax deduction'?
- A tax credit reduces taxable income; a deduction reduces tax liability
- A tax credit directly reduces the tax owed; a deduction reduces taxable income (Correct answer)
- Both reduce the tax owed by the same amount
- Tax credits apply to corporations only; deductions apply to individuals
Correct answer: A tax credit directly reduces the tax owed; a deduction reduces taxable income
A tax credit directly reduces the tax liability dollar-for-dollar, making it more valuable than a deduction, which only reduces taxable income.
Question 4: What does the legal concept of 'piercing the corporate veil' mean?
- Disclosing confidential corporate information to regulators
- Holding shareholders personally liable for corporate debts when they have abused the corporate form (Correct answer)
- Removing the board of directors due to misconduct
- Dissolving a corporation through legal proceedings
Correct answer: Holding shareholders personally liable for corporate debts when they have abused the corporate form
Piercing the corporate veil occurs when courts hold shareholders personally liable for corporate debts, typically where the corporate form has been abused or used fraudulently.
Question 5: Which of the following describes a 'sole trader' (sole proprietorship) in US business law?
- A business owned by multiple shareholders with limited liability
- An unincorporated business owned and operated by one individual, with unlimited personal liability (Correct answer)
- A not-for-profit organization run by a single director
- A corporation with a single majority shareholder
Correct answer: An unincorporated business owned and operated by one individual, with unlimited personal liability
A sole proprietorship is an unincorporated business owned and operated by one individual, who has unlimited personal liability for all business debts.
Question 6: In the context of US corporate taxation, what is 'accelerated depreciation'?
- Claiming depreciation over a shorter period than the asset's useful economic life to reduce taxable income sooner (Correct answer)
- Writing off an asset's full cost in the year of purchase
- Increasing the book value of an asset over time
- Claiming depreciation based on actual asset usage
Correct answer: Claiming depreciation over a shorter period than the asset's useful economic life to reduce taxable income sooner
Accelerated depreciation allows businesses to claim higher depreciation deductions in the early years of an asset's life, reducing taxable income sooner.
CIMA Business Law and Taxation 2
Under US tax law, what is the 'matching principle' in the context of corporate taxation?