Chapter 1- Accounting Methods

Question 1

Cash Method

Answer 1

Accounts for income when the first of the following occurs:

1. Cash is actually received
2. A Cash equivalent is actually received
3. Cash or its equivalent is constructively received

Question 2

Income or Losses reported on Schedule C

Answer 2

Sole Proprietorship

Question 3

Characteristics of a Corporation

Answer 3

1. Double Taxation
2. Limited Liability to the owners
3. Tax return due 15th day of the 3rd month following their end of tax year

Question 4

Characteristics of Closely Held Corporations

Answer 4

1. not a personal service corporation
2. Any time during the last half of the tax year that more than 50% of its stock is owned by 5 of less people (including trusts and foundations)
3. Subject to at-risk rules

Question 5

Characteristics of an S Corp.

Answer 5

1. income is not taxed at the corporate level
2. income is taxed to shareholders when earned by the S-Corp
3. Limited Liability to Owners
4. S Corps are required to be on the calendar tax year

Question 6

IRS Consent is NOT required for the following changes

Answer 6

1. Adopting a LIFO Inventory valuation (switching to LIFO requires consent)
2. Switching from declining- balance depreciation to straight-line.
3. making an adjustment in the useful life of certain assets
4. Correcting an error in computing tax

Question 7

If inventory is used the ________ accounting method must be used for purchases and sales

Answer 7

Accrual

Question 8

Cash Method of Accounting…

Answer 8

Accounts for income when the first of the following occurs:

1. Cash is actually received
2. a cash equivalent is actually received
3. Cash or its equivalent is constructively received

Question 9

Constructive Receipt

Answer 9

An item is to be included in gross income when a person has an unqualified right to immediate posession

Question 10

Prepaid rent is gross income when ________

Answer 10

it is received

Question 11

True or False

Security deposits are considered income?

Answer 11

False

Question 12

Advance payments in general….

Answer 12

expenses that you pay in advance can be deducted only in the year to which they apply regardless of using the cash or accrual form of accounting

Question 13

Accrual Method Taxpayer accounts for income….

Answer 13

The period when it is earned.

Question 14

All taxpayers that maintain an inventory must use the ______ method of accounting with regard to purchases and sales

Answer 14

Accrual

Question 15

Exceptions to the mandatory accrual method in regard to inventory

Answer 15

1. a qualifying taxpayer that satisfy the average annual gross receipts (including test year and 2 preceding years) for each test year must be $1 Million or less
2. Small businesses whose gross receipts for each test year are under $10 Million