Module 3 Flashcards
For financial reporting purposes, most businesses would rather:
Accelerate income and defer expenses
For tax reporting purposes, most businesses would rather
Defer income and accelerate expenses
Accrual Method Financial Reporting:
Revenue is recognized when…
when it is earned (products are delivered/services are provided), and when it is realized (cash is recieved or there is a legal claim to cash being received in the future)
Accrual Method Financial Reporting:
Expenses are recognized in…
the same period as the revenues to which they relate. Expenses are recognized when incurred (the benefit is derived) rather than when the associated cash is paid.
Tax - Cash Method:
Expenses are recognized when…
paid or constructively received
Tax - Cash Method:
Revenue is recognized when…
actually or constructively received
What are some pros of using the cash method for tax?
Flexible, simple and relatively inexpensive
What are some cons of using the cash method for tax?
Not US GAAP (poor matching), limited use (not available for some businesses)
Constructive receipt
For cash basis tax reporting, income is considered to be received when credited to an account, set apart or otherwise made available to draw upon or could have drawn upon if notice had been given
Income recognition for tax under the accrual basis
Income is recognized when…
Earned or received
Income is earned if it meets the all-events test
All-events test
Income is earned when…
1. All the events have occurred that fix th right to receive such income, and
2. The amount to be received can be determined with reasonable accuracy
When do all events occur?
- Sale or service is completed
- Payment is due
- Payment is received
Advance payments for rent or interest under the accrual method for income tax…
The taxpayer must recognize income when cash is received
