Amber Book Practice Management (PcM) Practice Test

Cash basis accounting is used to calculate taxes.

Not used Both Accrual basis Cash basis

Correct Answer:

Cash basis

Explanation:

In tax accounting, the timing of income and deductions is determined by the method used. For most taxpayers, cash basis is used, meaning income is reported when cash or its equivalent is received and deductions are taken when cash is paid. This aligns tax liability with actual cash flow and keeps records simple for individuals and many small businesses. The accrual method, by contrast, records income when earned and expenses when incurred, regardless of cash movement, and is required for certain entities or situations (such as some large corporations or inventory scenarios) unless they qualify for the cash method. So the statement is true for the majority of taxpayers, making cash basis the best answer.

Access more questions from this quiz

Continue to Amber Book Practice Management (PcM) Practice Test for more practice questions and the full quiz experience.

Access More Questions