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Regulation > 13.4 - Accounting Methods > Flashcards

13.4 - Accounting Methods Flashcards

1
Q

What is a tax year?

A
  • Annual accounting period used to keep a person’s books and records
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2
Q

Tax Year

Provide 2 examples of a tax year

A
  • Calendar year (ending December 31st)
  • Fiscal year (any 12-month period ending on the last day of the month)
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3
Q

Tax Year

True or False >>>

a 52 / 53 week tax year must always end on a Friday

A

False -

  • Must always end on the same day of the week
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4
Q

Tax Year

When is the short tax year acceptable?

A
  • Must annualize income
  • Year of startup / dissolution
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5
Q

Tax Year

What must an entity do to change their tax year?

A
  • Can change tax year after gaining IRS consent
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6
Q

Tax Year

What type of tax return must an entity file when changing their tax year after gaining IRS consent?

A
  • Short tax year return required
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7
Q

Accounting Method

What is an accounting method?

A
  • Method of accounting regularly used to compute income in keeping books and records
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8
Q

Accounting Method

What are the two types of accounting methods?

A
  • Cash method and accrual method
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9
Q

Accounting Method

Does the change in accounting method require IRS consent?

A

Yes

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10
Q

Identify 5 accounting changes that can be made without IRS consent

A
  • Adopting LIFO inventory valuation
  • Switching from declining-balance to straight line depreciation
  • Making adjustments in useful lives of certain assets
  • Correcting an error in computing tax
  • Changing from accrual method to the installment method of reporting income
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11
Q

Cash Method:

When is income accounted for under the cash method?

A
  • Accounts for income when:
    • Cash is actually received
    • Cash equivalent is actually received
    • Cash or equivalent is constructively received
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12
Q

Cash Method:

How is the value of noncash property / services accounted for under the cash method?

A
  • FMV of noncash property / services is included in GI
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13
Q

Cash Method:

Define the proper cash method accounting treatment when the value of property received cannot be determined

A
  • FMV of property given up will be treated as the amount of income to recognize
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14
Q

Doctrine of Constructive Receipt:

Does deferring deposit of a check defer income?

A

No

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15
Q

Doctrine of Constructive Receipt:

When are items included in GI under the “doctrine of constructive receipt”?

A
  • when a person has an unqualified right to immediate possession
  • Constructively receives in tax year during which it is credited to his/her account, set apart for him/her or otherwise made available so that he/she may draw upon it at anytime
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16
Q

Doctrine of Economic Benefit

Define gross income according to the doctrine of economic benefit

A
  • GI includes any economic or financial benefit conferred on an employee as compensation
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17
Q

Doctrine of Economic Benefit

Does the doctrine of economic benefit still apply when the taxpayer cannot choose to take the equivalent value of the income in cash?

A

Yes

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18
Q

Accrual Method

Identify the types of entities that are required to use the accrual accounting method

A
  • C Corporations,
  • partnerships with a C corporation as a partners, and
  • tax shelters
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19
Q

Accrual Method

Identify the exceptions available to corporations who must normally use the accrual method of accounting

A
  • Exceptions:
    • Qualified personal service corporations
    • Entities with < $5 million in average gross receipts in the 3 preceding years
    • Farming or tree-raising businesses
20
Q

Accrual Method

True or False >>>

  • Taxpayer that maintains inventory must use the accrual method for purchases and sales, with exceptions for qualifying taxpayers that have minimum gross receipts from sale of that inventory
A

True

21
Q

Accrual Method

What accounting method must an entity use to report income if they use accrual for expenses?

A

the same accounting method used to report income must also be used to report expenses and vice versa.

22
Q

Accrual Method

When does the accrual method account for income?

A
  • Accounts for income in the period it is actually earned
23
Q

Define the “All Events Test”

A
  • Income is included when:
    • All the events have occurred that fix the right to receive it and
    • The amount can be determined with reasonable accuracy
24
Q

Right Not Fixed

What is the right not fixed contingent on?

A

future events

25
Q

Right Not Fixed

When must prepaid income be included in income under “right not fixed”?

A
  • Prepaid income must be included in income when received
    • For both cash and accrual methods
26
Q

When are deductions allowed under both the cash and accrual accounting methods?

A

When the amount can be determined with reasonable accuracy

27
Q

Inventory

True or False >>>

Gross income includes receipts reduced by COGS for both manufacturing and purchasing entities

A

True

28
Q

Inventory

When can LIFO be used for tax purposes?

A

If it is also used for financial reporting

29
Q

Long-Term Contracts:

What is a long-term contract?

A
  • Contract completed in a tax year subsequent to the one in which it was entered into
30
Q

Long-Term Contracts:

What method must be used to account for all long-term contracts?

A
  • Must use the same method to account for all long-term contracts
    • Percentage of completion
    • Completed contract method
31
Q

Long-Term Contracts:

What is the completed contract method?

A
  • Receipts accounted for in tax year in which contract is completed
32
Q

Long-Term Contracts:

When is the completed contract method allowed?

A
  • Only allowed for home construction projects or small businesses with average annual gross receipts not greater than $10 million for 3 preceding tax years’ subject to additional restrictions
33
Q

Long-Term Contracts:

Define the % of completion method for long-term contracts

A
  • Reports as income that portion of the total contract price that represents the % of total work completed in the year
34
Q

Long-Term Contracts:

What is the formula to calculate the percentage of completion?

A

(cost for tax year) / (total expected cost)

35
Q

Installment Method:

When is the installment method required?

A
  • Required for installment sales by both cash-method and accrual method taxpayers
36
Q

Installment Method:

Do the election exist to not apply the installment method?

A

Yes

37
Q

Installment Method:

What is an installment sale?

A
  • Disposition of property in which at least one payment received after year of sale
38
Q

Installment Method:

Does the installment apply to both losses and gains?

A

No - only gains

39
Q

Installment Method:

When are losses recognized under the installment method?

A
  • Loss fully recognized in year realized
40
Q

Installment Method:

Provide 5 situations where the installment method is not applied

A
  • Generally, not applied to:
    • Inventory personal property sales
    • Revolving credit sales
    • Dealer disposition
    • Publicly traded securities
    • Sales by manufacturers of tangible personal property
41
Q

Installment Method:

When must depreciation recapture be recongized under the installment method?

A
  • Depreciation recapture must be recognized in year of sale regardless of payments received
42
Q

Installment Method:

Identify the 3 step process in calculating installment sale income

A
  • Step # 1: Calculate gross profit:
  • Step # 2: Calculate gross profit %
  • Step # 3: Calculate current year IS Income
43
Q

Installment Method:

Calculate gross profit in step # 1 of the 3 step process to calculating installment sale income under the installment method

A

Contract Price - COGS

44
Q

Installment Method:

Calcualte gross profit % in step # 2 of the 3-step process to calculating installment sale income under the installment method

A

Gross Profit / Contract Price

45
Q

Installment Method:

Calculate installment sale income in step # 3 of the 3-step process of calculating installment sale income under the installment method

A

Current Year Income * Gross Profit %

46
Q

Tax Year:

What is the annualized income calculation?

A

(12 months / short tax year months) * short tax year income

47
Q

What is the short tax year calculation?

A

(short tax year months / 12 months) * annualized income tax

Regulation (67 decks)

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