FFA EA Book Reference: CH 10 Business Entities
Subsection: Business expenses deductions and credits
Subject: Employment Taxes
4. Explanation:
If a business manufactures products or purchases them for resale, it generally must value
inventory at the beginning and end of each tax year to determine cost of goods sold. Cost of
goods sold is deducted from gross receipts to figure gross profit for the year. Administrative
salaries and office supplies are not directly related to the cost of the manufactured product and
are not part of the cost of goods sold. The following are types of expenses that go into figuring
cost of goods sold:
The cost of products or raw materials, including freight.
Storage
Direct labor (including contributions to pension or annuity plans) for workers who produce the
products.
Factory overhead.
Beginning Inventory
$0
Raw Materials$35,000
Factory Overhead
$6,000
Direct Labor
$27,000
Shipping
$1,585
Ending inventory
($10,000)
Cost of Goods Sold
$59,585
Correct Answer: B
FFA EA Book Reference: CH 10 Business Entities
Subsection: Business income
Subject: Cost of goods sold (e.g., inventory practices, expenditures included, uniform
capitalization rule)
5. Explanation:
To determine whether an individual is an employee or an independent contractor under the
