CAF-2 · Chapter 7 · Question 11 of 15
A person accounting for business income on a cash basis may compute the cost of stock-in-trade using either the prime-cost or absorption-cost method. What method MUST a person accounting on an accrual basis use?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) B) Absorption-cost method
Explanation
Section 35 dictates that a person accounting for income on an accrual basis MUST compute the cost of stock-in-trade using the absorption-cost method (which includes direct materials, direct labor, and all factory overheads).
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