SEE - Special Enrollment Exam Quiz: Gross Receipts And Inventory
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Gross Receipts And InventoryQuestion 1 of 15

Clover Corporation, a calendar-year manufacturer, has always used FIFO for both tax and financial reporting. For 2025, Clover wants to elect LIFO. It attaches a completed Form 970 to its 2025 return and values its 2025 ending inventory using LIFO for tax purposes. Clover continues to present FIFO inventory values in the 2025 financial statements it issues to its shareholders.

Which of the following is correct regarding Clover's proposed LIFO election?

The election is valid because tax accounting and financial accounting may differ and Form 970 was attached to the return.
The election is valid, but Clover must file Form 3115 in the following year to conform its financial statements to LIFO.
The election is invalid because using FIFO in the financial statements it issues to shareholders violates the LIFO conformity requirement.
The election is invalid because a taxpayer must use LIFO in its financial statements for at least two years before making the election.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Gross Receipts And Inventory

Practice Gross Receipts And Inventory in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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Question 1

Clover Corporation, a calendar-year manufacturer, has always used FIFO for both tax and financial reporting. For 2025, Clover wants to elect LIFO. It attaches a completed Form 970 to its 2025 return and values its 2025 ending inventory using LIFO for tax purposes. Clover continues to present FIFO inventory values in the 2025 financial statements it issues to its shareholders.

Which of the following is correct regarding Clover's proposed LIFO election?

  1. The election is valid because tax accounting and financial accounting may differ and Form 970 was attached to the return.
  2. The election is valid, but Clover must file Form 3115 in the following year to conform its financial statements to LIFO.
  3. The election is invalid because using FIFO in the financial statements it issues to shareholders violates the LIFO conformity requirement. (correct answer)
  4. The election is invalid because a taxpayer must use LIFO in its financial statements for at least two years before making the election.
Explanation: IRC §472(c) imposes the LIFO conformity requirement: a taxpayer using LIFO for tax must also use LIFO in ascertaining income, profit, or loss for reports or statements to shareholders and creditors. Clover's attachment of Form 970 and use of LIFO on its 2025 return are not enough; the FIFO financial statements issued to shareholders for 2025 violate the conformity requirement, so the election is invalid, and Choice C is correct. Choice A is wrong because, although tax and financial accounting generally may differ, the LIFO conformity requirement is a specific exception, and attaching Form 970 does not cure the failure. Choice B is wrong because no later Form 3115 filing can conform the prior financial statements; the conformity requirement applies for the year of election. Choice D is wrong because the law imposes no two-year prior-use requirement for financial statements.

Question 2

Marisol's Boutique values its inventory for 2025 at the lower of FIFO cost or market, applied item by item. One product has a cost of $120, a current replacement cost of $80, an estimated selling price of $150, estimated costs of completion and disposal of $10, and a normal profit margin of 20% of the selling price.

What amount should Marisol assign to this item in ending inventory?

  1. $80, because for tax purposes market is the item's current replacement cost (bid price). (correct answer)
  2. $110, because replacement cost is below net realizable value less a normal profit, so market is that floor.
  3. $120, because no write-down may be recognized while the goods remain on hand and unsold.
  4. $140, because market is the estimated selling price reduced only by completion and disposal costs.
Explanation: Treas. Reg. § 1.471-4(a). For tax purposes, market under the lower of cost or market method is the current bid price for the item in the volume usually purchased, that is, its replacement cost. The regulation has no net-realizable-value ceiling or floor; those are financial accounting rules. The exception for goods offered for sale below the current bid price does not apply, because she offers the item at $150, well above its $80 replacement cost. Market is $80, lower than the $120 cost, so the item is valued at $80. Choice A is correct. Choice B applies the financial accounting floor of $150 - $10 - $30 = $110. Choice C wrongly bars a write-down of goods still on hand; lower of cost or market exists to allow one. Choice D uses net realizable value, $150 - $10 = $140, as market.

Question 3

Priscilla runs a retail boutique as a sole proprietor. Her 2025 records show cash and credit card sales of $180,000 before sales tax; sales tax of $14,400, which state law imposes on the buyer and which she collected from customers and remitted in full to the state; customer refunds of $7,000 for merchandise returned in 2025; and the sale of display shelving used in the store for $3,500, with an adjusted basis of $1,200. She has no other business income.

What amount should Priscilla report on Schedule C for 2025 as net sales (gross receipts less returns and allowances)?

  1. $173,000 (correct answer)
  2. $176,500
  3. $187,400
  4. $190,900
Explanation: IRC § 61; Instructions for Schedule C (Form 1040); Pub. 334. Net sales on Schedule C are gross receipts less returns and allowances. Sales tax that state law imposes on the buyer, and that the seller collects as the state's agent and remits, may be excluded from gross receipts; only a tax imposed on the seller is included in gross receipts and then deducted. The proceeds from selling business-use display shelving are not gross receipts from sales; that sale is reported on Form 4797. Net sales are $180,000 − $7,000 = 173,000.ChoiceAiscorrect.ChoiceB(173,000. Choice A is correct. Choice B (176,500) is wrong because it adds the 3,500shelvingproceeds,whichbelongonForm4797.ChoiceC(3,500 shelving proceeds, which belong on Form 4797. Choice C (187,400) is wrong because it includes the 14,400ofsalestaximposedonbuyers,whichisexcludedfromgrossreceipts.ChoiceD(14,400 of sales tax imposed on buyers, which is excluded from gross receipts. Choice D (190,900) is wrong because it includes both the sales tax and the shelving proceeds.

Question 4

Thornwood Manufacturing, an accrual-basis corporation subject to §263A, produces goods. In 2025, it incurred salaries for the purchasing department, costs of newspaper advertisements for its finished goods, commissions paid to outside sales representatives, and freight costs for delivering finished goods to customers.

Which of the following costs is required to be capitalized into inventory under §263A?

  1. Salaries of the purchasing department (correct answer)
  2. Costs of newspaper advertisements for finished goods
  3. Commissions paid to outside sales representatives
  4. Freight costs for delivering finished goods to customers
Explanation: IRC §263A(a)(2); Treas. Reg. §1.263A-1. For a producer required to capitalize costs, indirect costs that benefit production—including purchasing costs—must be capitalized into inventory. Selling, marketing, advertising, and distribution costs are not §263A costs and remain currently deductible. Choice A is therefore correct. Choices B, C, and D fall into the non-capitalized selling and distribution categories.

Question 5

Beacon Distributing, a calendar-year C corporation, has been in existence since 2016 and sells wholesale hardware. It has used an accrual method and maintained inventories. Its gross receipts were $30,000,000 for 2022, $35,000,000 for 2023, and $31,500,000 for 2024. In 2025, Beacon’s gross receipts were $29,500,000. Beacon wants to change to the cash method and apply the small-business inventory exception for 2025.

Which of the following is correct regarding Beacon's ability to make this change for 2025?

  1. Beacon may make the change because its 2025 gross receipts are below the $31,000,000 gross-receipts ceiling.
  2. Beacon may make the change only if it files Form 3115 and obtains automatic consent, regardless of the amount of its gross receipts.
  3. Beacon cannot make the change because its average annual gross receipts for 2022 through 2024 exceed $31,000,000. (correct answer)
  4. Beacon cannot make the change because a C corporation is never eligible to use the cash method or the small-business inventory exception.
Explanation: IRC §§448(c)(1) and 471(c). For 2025, the gross-receipts test is based on the average annual gross receipts for the three preceding tax years, not the current year. Beacon's 2022–2024 average is $32,166,667, which exceeds $31,000,000, so it is not a small business taxpayer and cannot use the cash method or the §471(c) inventory exception. Choice A uses the wrong lookback year. Choice B confuses the method-change procedure with eligibility. Choice D is false because C corporations that meet the gross-receipts test may use the cash method.

Question 6

Riley's Home Goods, a calendar-year retail store, uses the conventional retail inventory method (lower of cost or market). At the beginning of 2025, its inventory had a cost of $18,000 and a retail value of $25,000. During 2025, purchases cost $50,000 and had a retail value of $70,000; freight-in was $2,000; net markups were $5,000; net markdowns were $3,000; and sales at retail were $60,000.

What is Riley's ending inventory at cost for 2025?

  1. $25,900 (correct answer)
  2. $26,701
  3. $28,000
  4. $30,100
Explanation: Treas. Reg. §1.471-8. Under the conventional retail method, the cost complement is cost of goods available for sale divided by retail value of goods available for sale, including net markups but excluding net markdowns: ($18,000 + $50,000 + 2,000)÷(2,000) ÷ (25,000 + $70,000 + $5,000) = 70%. Ending inventory at retail is $25,000 + $70,000 + $5,000 − $3,000 − $60,000 = $37,000, so ending inventory at cost is 70% × $37,000 = $25,900. Choice B includes net markdowns in the cost-complement denominator (the cost-retail treatment rather than the conventional LCM treatment): $70,000 ÷ $97,000 ≈ 72.16%, × $37,000 = 26,701.ChoiceComitsnetmarkdownswhencomputingendinginventoryatretail(26,701. Choice C omits net markdowns when computing ending inventory at retail (40,000 × 70% = 28,000).ChoiceDaddsnetmarkdownstoendinginventoryatretail(28,000). Choice D adds net markdowns to ending inventory at retail (43,000 × 70% = $30,100).

Question 7

Petra's Craft Supply, a calendar-year sole proprietorship, uses a periodic inventory system and will take a physical count on December 31, 2025. Its records as of that date show: (1) kits shipped to retailers on consignment; (2) kits purchased FOB shipping point that were loaded on a common carrier on December 28, 2025, and arrived at Petra's dock on January 3, 2026; and (3) kits sold to a customer FOB destination that were shipped on December 30, 2025, and are still in transit on December 31.

Which of the following correctly describes the items that must be included in Petra's ending inventory for 2025?

  1. The consigned kits and the FOB shipping point kits, because title to those kits remains with Petra.
  2. The consigned kits and the FOB destination kits, because the FOB shipping point kits are in the carrier's possession.
  3. The FOB shipping point kits and the FOB destination kits, because consigned kits are held for sale by the retailers.
  4. The consigned kits, the FOB shipping point kits, and the FOB destination kits, because title to each group is still vested in Petra. (correct answer)
Explanation: Treas. Reg. §1.471-1. Inventory includes merchandise in which title is vested in the taxpayer. Consigned goods remain the consignor's property until sold, so Petra includes them. Under FOB shipping point, title to the incoming kits passed to Petra when they were delivered to the carrier on December 28. Under FOB destination, title to the outgoing kits does not pass until delivery, so Petra still owns them in transit. Choice D is correct; Choice A omits the outgoing FOB destination kits, Choice B misstates the FOB shipping point rule, and Choice C treats the consignee retailers as owners of consigned goods.

Question 8

Bennett Manufacturing, Inc. is a calendar-year C corporation. During 2025, Bennett had the following receipts: • Gross sales of manufactured goods: $27,400,000, less sales returns and allowances of $200,000 • Proceeds from the sale of land held for investment: $1,500,000; adjusted basis: $900,000 • Interest income on certificates of deposit: $80,000 • Dividends from a 10%-owned corporation: $150,000 • Rents from a commercial building leased to an unrelated tenant: $320,000 • Proceeds from a $400,000 bank loan

What is the amount of Bennett's 2025 gross receipts for purposes of the §448(c) gross receipts test?

  1. $27,750,000
  2. $28,350,000 (correct answer)
  3. $28,750,000
  4. $29,250,000
Explanation: IRC § 448(c) and Temp. Treas. Reg. § 1.448-1T(f)(2)(iv)(A). Gross receipts for the gross receipts test include total sales net of returns and allowances, and all amounts received for services and from investments, including interest, dividends, and rents. Gross receipts from the sale of capital assets and property described in § 1231 or § 1221(a)(2) are taken into account only net of the property's adjusted basis. Borrowed amounts are not receipts derived from the taxpayer's activities and are excluded. Computation: sales net of returns and allowances, $27,400,000 - $200,000 = $27,200,000; land sold, $1,500,000 - $900,000 adjusted basis = $600,000; interest, $80,000; dividends, $150,000; rents, $320,000; bank loan proceeds, excluded. Total = $27,200,000 + $600,000 + $80,000 + $150,000 + $320,000 = $28,350,000, which is Choice B. This is Bennett's 2025 gross receipts for the § 448(c) test; the test itself generally uses average annual gross receipts for the 3-taxable-year period ending with the prior tax year. Choice A (27,750,000)omitsthelandsaleentirely;thesaleofacapitalassetisincluded,netofadjustedbasis.ChoiceC(27,750,000) omits the land sale entirely; the sale of a capital asset is included, net of adjusted basis. Choice C (28,750,000) includes the 400,000bankloan;loanproceedsarenotgrossreceipts.ChoiceD(400,000 bank loan; loan proceeds are not gross receipts. Choice D (29,250,000) uses the $1,500,000 gross proceeds from the land sale instead of reducing them by the $900,000 adjusted basis.

Question 9

Hartwell Distributing Co., a calendar-year accrual-basis corporation that sells plumbing supplies at wholesale, uses a periodic inventory system. For 2025, Hartwell had the following: • Inventory, January 1, 2025: $90,000 • Merchandise purchases during 2025: $510,000 • Purchase discounts taken: $10,000 • Freight-in: $25,000 • Inventory on hand per the December 31, 2025 physical count: $74,000

The physical count excluded $18,000 of goods Hartwell had shipped on consignment to a dealer, and it also excluded $22,000 of goods Hartwell held on consignment from a manufacturer.

What amount should Hartwell report as cost of goods sold for 2025?

  1. $498,000
  2. $501,000
  3. $523,000 (correct answer)
  4. $541,000
Explanation: IRC §471 and Treas. Reg. §1.471-1 require a taxpayer using inventories to include in ending inventory all merchandise to which it holds title, including goods out on consignment; goods held on consignment from another belong to the consignor and are excluded from the consignee's inventory. Under the periodic method, cost of goods sold equals beginning inventory plus purchases minus purchase discounts plus freight-in minus ending inventory. Computation: goods available for sale = $90,000 + $510,000 - $10,000 + $25,000 = $615,000. Ending inventory = $74,000 physical count + $18,000 of consigned-out goods = $92,000. The $22,000 of consigned-in goods are not Hartwell's inventory. Cost of goods sold = $615,000 - $92,000 = $523,000. Choice A ($498,000) omits the 25,000offreight−infromgoodsavailableforsale;freight−inispartofthecostofmerchandisepurchasedandmustbecapitalizedintoinventory.ChoiceB(25,000 of freight-in from goods available for sale; freight-in is part of the cost of merchandise purchased and must be capitalized into inventory. Choice B (501,000) adds the 22,000ofconsigned−ingoodstoendinginventory;titletothosegoodsremainswiththemanufacturer,sotheybelonginthemanufacturer′sinventory,notHartwell′s.ChoiceD(22,000 of consigned-in goods to ending inventory; title to those goods remains with the manufacturer, so they belong in the manufacturer's inventory, not Hartwell's. Choice D (541,000) leaves the $18,000 of consigned-out goods out of ending inventory; merchandise shipped on consignment remains the consignor's inventory until sold.

Question 10

Summit Fabrication, Inc., a calendar-year C corporation that is not a tax shelter, was incorporated on January 1, 2023. Summit's gross receipts for purposes of IRC §448(c) were $18,000,000 in 2023, $34,000,000 in 2024, and $43,000,000 in 2025. Summit is determining whether it qualifies as a small business taxpayer for 2025, which would allow it to use the cash method and to account for its inventory under the §471(c) small business exception.

What is Summit's average annual gross receipts for purposes of the §448(c) gross receipts test for 2025?

  1. $17,333,333
  2. $26,000,000 (correct answer)
  3. $31,666,667
  4. $43,000,000
Explanation: IRC §448(c)(1) and Temp. Treas. Reg. §1.448-1T(f)(2) provide that the gross receipts test for a taxable year is based on average annual gross receipts for the 3-tax-year period ending with the taxable year that precedes the current year. A taxpayer not in existence for the entire 3-tax-year period computes the average over the period it was in existence. For Summit's 2025 test, the lookback period is 2022 through 2024. Summit existed only in 2023 and 2024, so its average annual gross receipts = ($18,000,000 + $34,000,000) / 2 = $26,000,000. Because $26,000,000 does not exceed the 2025 threshold of $31,000,000, Summit meets the test for 2025 even though its 2025 gross receipts are $43,000,000. Choice A (17,333,333)treatsthepre−existenceyear2022asazeroyearinthe3−yearaverage;yearsbeforethetaxpayercameintoexistencearenotcounted,andtheaverageiscomputedoverthetwoyearsofexistence.ChoiceC(17,333,333) treats the pre-existence year 2022 as a zero year in the 3-year average; years before the taxpayer came into existence are not counted, and the average is computed over the two years of existence. Choice C (31,666,667) includes 2025's 43,000,000inthe3−yearaverage;thetestfor2025looksbacktotheperiodendingwith2024,notthecurrentyear.ChoiceD(43,000,000 in the 3-year average; the test for 2025 looks back to the period ending with 2024, not the current year. Choice D (43,000,000) substitutes 2025 gross receipts for the average; the test compares the average annual gross receipts with the threshold, not current-year receipts.

Question 11

For 2025, Keystone Corp., a retail corporation with average annual gross receipts of $45,000,000, is subject to the uniform capitalization rules of IRC §263A.

Which of the following costs is currently deductible rather than capitalized into inventory?

  1. Wages paid to employees who receive, inspect, and move merchandise at a regional distribution center.
  2. Rent paid for a warehouse used to store merchandise before shipment to retail stores.
  3. Salaries, commissions, and travel expenses of the corporation's purchasing department.
  4. Advertising costs for newspaper, internet, and direct-mail promotions of the corporation's merchandise. (correct answer)
Explanation: IRC § 263A. For a reseller subject to uniform capitalization, purchasing, handling, and off-site storage costs are capitalized into inventory, while selling, advertising, marketing, and distribution costs are not. Choice D is therefore the currently deductible cost. Choice A is a handling cost, Choice B is a storage cost, and Choice C is a purchasing cost, all of which are capitalizable.

Question 12

Meridian Corp., a calendar-year C corporation formed in 2019, is not a tax shelter. It maintains inventories and wants to change from the accrual method to the cash method for 2025 under the small business taxpayer exception. Its records show: 2022: gross sales $31,200,000; returns and allowances $700,000; interest income $400,000 2023: gross sales $32,000,000; returns and allowances $1,000,000; interest income $200,000 2024: gross sales $32,400,000; returns and allowances $1,500,000; interest income $300,000

For purposes of the §448(c) gross receipts test, which of the following is correct?

  1. Meridian is eligible for 2025 because its average annual gross receipts for 2022–2024 are $30,800,000.
  2. Meridian is not eligible for 2025 because its average annual gross receipts are $31,866,667 when gross sales are not reduced by returns and allowances.
  3. Meridian is not eligible for 2025 because its average annual gross receipts for 2022–2024 are $31,100,000. (correct answer)
  4. Meridian is not eligible for 2025 because its gross receipts for 2024 are $31,200,000, which exceeds the threshold for that year.
Explanation: IRC § 448(c). Gross receipts for the test are not reduced by cost of goods sold, are reduced by returns and allowances, and include interest income. Meridian's 2022, 2023, and 2024 gross receipts are $30,900,000, $31,200,000, and $31,200,000, for a three-year average of $31,100,000, so it does not meet the $31,000,000 threshold. Choice C is correct. Choice A omits interest income. Choice B fails to reduce gross receipts by returns and allowances. Choice D applies the threshold to a single year instead of the three-year average.

Question 13

Atlas Corp., a calendar-year accrual-basis corporation, uses a periodic inventory system. For 2025, its records show: beginning inventory, $80,000; purchases at invoice price before trade discounts, $420,000; trade discounts, $20,000; freight-in, $15,000; purchase returns, $10,000; ending inventory, $95,000.

What amount should Atlas report as cost of goods sold for 2025?

  1. $410,000
  2. $400,000
  3. $390,000 (correct answer)
  4. $375,000
Explanation: Treas. Reg. § 1.471-3(b). Cost of purchased merchandise is invoice price reduced by trade discounts, plus freight-in and other acquisition costs, and purchases are reduced by purchase returns. Net purchases are $420,000 - $20,000 - $10,000 + $15,000 = $405,000. Cost of goods sold is $80,000 + $405,000 - $95,000 = $390,000. Choice C is correct. Choice A omits the trade discount. Choice B omits the purchase returns. Choice D treats freight-in as a current deduction rather than adding it to inventory cost.

Question 14

For 2025, which of the following is correct regarding the small business taxpayer exceptions that permit certain C corporations to use the cash method and to treat inventory as non-incidental materials and supplies?

  1. A C corporation that is not a tax shelter and whose average annual gross receipts for the three preceding tax years do not exceed $31,000,000 may use the cash method and may treat inventory as non-incidental materials and supplies under the §471(c) exception. (correct answer)
  2. A C corporation that is not a tax shelter may use the cash method for 2025 if its gross receipts for 2025 do not exceed $31,000,000, but it must continue to account for inventories under §471.
  3. For a C corporation that is not a tax shelter, the $31,000,000 gross receipts test is applied separately to each trade or business, so a business may qualify even when the corporation's aggregate receipts exceed that limit.
  4. A C corporation that is not a tax shelter and qualifies for the cash method under the gross receipts test must nevertheless use the accrual method for purchases and sales unless its inventory is entirely incidental to the business.
Explanation: IRC §§ 448(c) and 471(c). A C corporation that is not a tax shelter may use the cash method if its average annual gross receipts for the three preceding tax years do not exceed $31,000,000, and a qualifying small business taxpayer may also treat inventory as non-incidental materials and supplies. Choice A states this rule. Choice B misstates the look-back: the test is based on prior years, not current-year gross receipts. Choice C misstates the unit of measurement: the test is applied to the taxpayer's aggregate gross receipts, not separately to each trade or business. Choice D misstates the inventory exception: a qualifying taxpayer may use the §471(c) treatment even when its inventory is not incidental.

Question 15

For 2025, which of the following is correct regarding the LIFO inventory method?

  1. A taxpayer using LIFO for tax may use lower of cost or market for the same inventory if the resulting lower value is disclosed in a note attached to Form 970.
  2. A LIFO election is made by filing Form 970 with the taxpayer's timely filed income tax return (including extensions) for the first taxable year the method is used, and the LIFO inventory is then valued at cost. (correct answer)
  3. A taxpayer that wants to use LIFO must file Form 970 with an application for automatic consent before the end of the preceding taxable year.
  4. A taxpayer may use lower of cost or market for LIFO inventory if it also uses LIFO for financial reporting purposes and reflects the market write-down as a separate component of equity.
Explanation: IRC § 472 and Treas. Reg. § 1.472-3. A LIFO election is made by filing Form 970 with the timely filed return for the first taxable year for which LIFO is used, and LIFO inventory is valued at cost; lower of cost or market is not available for LIFO goods. Choice B states this rule. Choice A is wrong because disclosure does not permit lower of cost or market with LIFO. Choice C wrongly requires a prior application. Choice D wrongly permits a market write-down for LIFO inventory.