Business Finances practice

All 16 free business finances questions

1. A contractor keeps its books on the cash basis. When is revenue recognized and an expense deducted?

   • A When cash is received and paid Correct
   • B When revenue is earned and expenses incurred
   • C When invoices are issued and received
   • D When the job is finally completed

   The cash basis counts revenue when the money arrives and allows an expense in the year it is paid, so the timing tracks payments rather than the work performed. A strict cash method therefore keeps neither receivables nor payables on the books.

   CSLB Law Book 2026, p. 50

2. What does a balance sheet report about the financial position of a construction business?

   • A Its condition at one point in time Correct
   • B Its profit or loss across a period
   • C Its cash receipts during the period
   • D Its estimated costs on current jobs

   The balance sheet is a statement of the financial condition of a business at a certain point in time, which is why it is often called a snapshot; the statement that summarizes what happened across a period is the income statement.

   CSLB Law Book 2026, p. 51

3. What period does an income statement cover, and what does its bottom line show?

   • A A period of time; profit or loss Correct
   • B A single date; profit or loss
   • C A period of time; total assets
   • D A single date; total assets

   The income statement covers a stretch of time, a year, a quarter or a month, and sets revenue against expenses to reach the profit or loss, so that figure is its last line and the reason the statement is prepared.

   CSLB Law Book 2026, p. 56

4. How is working capital calculated from the current sections of a contractor's balance sheet?

   • A Current assets minus current liabilities Correct
   • B Current assets over current liabilities
   • C Current assets minus inventories
   • D Total assets minus total liabilities

   Working capital is the gap between total current assets and total current liabilities, so it measures what would be left over once every current debt had been settled.

   CSLB Law Book 2026, p. 60

5. In the sales and use tax rules for construction contractors, what test decides that an item is materials?

   • A It loses its identity when installed Correct
   • B It keeps its identity as an accessory
   • C It is used to process property
   • D It is removable without damage

   Materials are what a contractor incorporates into real property, so the test is loss of identity: when combined with other tangible personal property, materials lose their identity and become an integral and inseparable part of the real property. Bricks, cement, lumber, piping and wiring are the listed examples.

   CDTFA Pub. 9, p. 6 Reference document, not law.

6. Under the Sales and Use Tax Law, how many seller's permits must a person conducting business as a seller hold?

   • A One for each place of business Correct
   • B One covering every location operated
   • C One for each county of sale
   • D One for each calendar year

   Every person desiring to engage in or conduct business as a seller in this state must file an application for a permit for each place of business, so a second yard or office needs its own permit. The permit issued is valid only for the person named and for business at the place designated in it.

   Rev. & Tax. Code s. 6066

7. How must a retailer show the tax it is required to collect from a purchaser on a sales check?

   • A Displayed separately from the price Correct
   • B Included within the marked price
   • C Absorbed by the retailer entirely
   • D Shown only on the purchaser's request

   The tax required to be collected by the retailer from the purchaser must be displayed separately from the list price, the price advertised in the premises, the marked price or other price on the sales check, so it cannot be folded into a single quoted figure.

   Rev. & Tax. Code s. 6206

8. A new business keeps no books or records and has no annual accounting period. Which tax year must it use?

   • A The calendar year Correct
   • B A fiscal year it chooses
   • C A 52-53 week year
   • D Any twelve consecutive months

   A business must use a calendar tax year where it keeps no books or records, has no annual accounting period, has a present tax year that does not qualify as a fiscal year, or is required to use a calendar year by the Internal Revenue Code or the income tax regulations.

   IRS Pub. 583, p. 5 Reference document, not law.

9. In a set of business books, how does a journal differ from a ledger?

   • A Journal records transactions; ledger holds journal totals Correct
   • B Ledger records transactions; journal holds ledger totals
   • C Journal holds documents; ledger holds transactions
   • D Journal covers cash; ledger covers credit

   A journal is the book where each business transaction shown on the supporting documents is recorded, and a ledger is the book that contains the totals from all of the journals, organized into different accounts, so entries travel from the documents into the journals and from the journals into the ledger.

   IRS Pub. 583, p. 13 Reference document, not law.

10. On a balance sheet, what sits on the right side, and what is the relationship between the two sides?

    • A Liabilities and owners' equity, always equal Correct
    • B Liabilities alone, always equal to assets
    • C Assets and equity, equal at year end
    • D Liabilities and assets, equal at closing

    A balance sheet puts assets on the left and liabilities plus the owners' equity on the right, and the two sides are always equal, so a change on one side must be matched by a change on the other.

    CSLB Law Book 2026, p. 52

11. What is the amount, usually 10 percent, withheld from a contractor's progress payments until the project is satisfactorily completed and accepted?

    • A Retention, which the contractor has earned Correct
    • B A penalty for late performance
    • C Unearned income until it is released
    • D A deduction from the contract price

    Retention is the share of each progress payment held back until the project is satisfactorily completed and finally accepted, and the contractor has already earned that amount even though it has not yet been paid, so it is carried as an asset.

    CSLB Law Book 2026, p. 54

12. Under a cost-plus-a-fee construction contract, what does the customer pay the contractor for the goods furnished and installed?

    • A The cost of the goods, plus a fee Correct
    • B A marked-up selling price, plus a fee
    • C A single stated price for everything
    • D Separate charges for materials and installation

    A cost-plus-a-fee contract pays the contractor the cost of the goods rather than a marked-up selling price, plus a fee that may be either a lump sum or a percentage of those costs, so the customer pays no markup on the goods.

    CDTFA Pub. 9, p. 7 Reference document, not law.

13. How does the sales tax apply when a contractor buys tools, gasoline and thread-cutting oil for use in its own business?

    • A Tax applies; the contractor is the consumer Correct
    • B No tax; they may be bought for resale
    • C Tax applies only when the supplies are consumed
    • D No tax; supplies are treated as materials

    Contractors are the consumers of the supplies they use in their business, so tax applies to the sale of those supplies and tools to them and the items must not be purchased for resale.

    CDTFA Pub. 9, p. 35 Reference document, not law.

14. In a double-entry bookkeeping system, which side of each account carries debits and which carries credits?

    • A Debits left and credits right Correct
    • B Credits left and debits right
    • C Debits and credits in one column
    • D Debits and credits on either side

    In the double-entry system each account has a left side for debits and a right side for credits, so which side an amount is written on is fixed by whether it is a debit or a credit.

    IRS Pub. 583 (12-2024), p. 15 Reference document, not law.

15. Federal tax rules let a contractor deduct a business cost only when it is both ordinary and necessary. What does the ordinary half ask?

    • A Common and accepted in the field Correct
    • B Helpful and appropriate for the business
    • C Indispensable to running the business
    • D Recurring in every tax year

    The ordinary half is measured against trade practice, so a cost that other contractors in the same line of work regularly treat as normal passes it, and how vital the cost was to the business is not what the word asks.

    IRS Pub. 334 (2025), p. 32 Reference document, not law.

16. May a retailer advertise that it will absorb the sales tax, so that the tax is not added to the selling price?

    • A No, and a violation is a misdemeanor Correct
    • B Yes, if the retailer pays the tax
    • C Yes, except in printed advertising
    • D Yes, on a discounted sale only

    The law prohibits a retailer from advertising or stating to the public or any customer that it will assume or absorb the tax, that the tax will not be added to the selling price, or that any part of it will be refunded, and a violation is a misdemeanor.

    Rev. & Tax. Code ss. 6205 and 6207