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EA PART 2 > Unit 2: Accounting Periods and Methods > Flashcards

Unit 2: Accounting Periods and Methods Flashcards

1
Q

What two accounting periods can businesses use?

A
  1. Calendar Tax Year
  2. Fiscal Tax Year
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2
Q

What is a “Calendar Tax Year”

A

Is always twelve consecutive months beginning Jan 1st and ending Dec 31

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3
Q

What is a “Fiscal Tax Year”

A

Covers twelve consecutive months ending on the last day of any month except December

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4
Q

What is the 52/53 tax year?

A

Is a fiscal tax year that varies from 52 to 53 weeks but does not necessarily end on the last day of the month.

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5
Q

When does a business adopt at tax year>

A

When it files its first income tax return

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6
Q

1128

A

“Application to Adopt, Change, or Retain a Tax Year”

Is used to request a change in the tax year.

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7
Q

The IRS requires the use of the calendar year in the following instances:

A
  • If the business keeps no books or records
  • There is no annual accounting period
  • The IRS code or IRS regulations require the business to use the calendar year
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8
Q

What does it mean if a partnership or S corp has a “required tax year”

A

It means that, unless the partnership can establish a legitimate business purpose for a different tax year, a partnership’s “required” tax year must conform to its partner’s tax years.

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9
Q

What is a “Natural” Tax Year?

A

Is a fiscal year in which the last two months of the year provide over 25% of the business’s gross receipts for the entire year.

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10
Q

8716

A

“Election to Have a Tax Year Other Than a Required Tax Year”

Used by partnerships, s corps, or Personal Service Corporation (PSC) to request to use a tax year other than its required tax year.

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11
Q

A business can request a section 444 election if it meets all of the following requirements

A
  • It is not a member of a tiered structure
  • It has not previously had a Section 444 election in effect
  • It elects a year that meets the deferral period requirement
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12
Q

Generally, the IRS will allow a section 444 election only if the deferral period is less than the shorter of:

A
  • Three months
  • The deferral period of the tax year being changed
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13
Q

How long does a Section 444 election stay in place?

A

Until it is terminated

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14
Q

A Section 444 election ends automatically when any of the following occurs:

A
  • The entity changes to its required tax year
  • The entity liquidates
  • The entity becomes a member of a tiered structure
  • The IRS determines that the entity willfully failed to comply with the required payments or distributions
  • The entity is an S corporation, and the S election is terminated
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15
Q

Due Date: Sole Proprietorships

A

April 15/October 15

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16
Q

Due Date: Partnerships

A

March 15/ September 15

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17
Q

Due Date: C Corps (except June 30 fiscal years)

A

April 15 / October 15

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18
Q

Due Date: C Corps (fiscal year ending June 30)

A

Septemeber 15 / April 15

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19
Q

Due Date: S corporations

A

March 15 / September 15

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20
Q

Due Date: Exempt Organizations (Form 990)

A

May 15 / November 15

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21
Q

Due Date: Form 1041

A

April 15 / September 30

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22
Q

Due Date: FBAR

A

April 15 / October 15

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23
Q

Due Date: Retirement Plans

A

July 31 / October 15

24
Q

Due Date: Estate tax return (706)

A

Nine months after death, six-month extension

25
Q

4 types of accounting methods

A
  • Cash method
  • Accrual Method
  • Special methods of accounting for certain items of income and expenses
  • Hybrid method (Using elements of the methods above)
26
Q

Who is allowed to use the cash method of accounting?

A

Taxpayers (other than tax shelters) with less than $27 million in annual gross receipts, regardless of the taxpayer’s industry, or whether or not the business produces inventory.

27
Q

Can partnerships & S corps use the cash method?

A

Yes, regardless of their annual gross receipts

28
Q

3115

A

Filed by taxpayers to switch from the accrual method to the cash method of accounting of vice versa

29
Q

The following businesses are generally required to use the accrual method

A
  • A C corp, or partnership with a C corp partner, with average annual gross receipts exceeding $27 million in 2022
  • Any tax shelter, regardless of its size
30
Q

If any entity fails to meet the applicable gross receipts test for any tax year, then:

A

They will be prohibited from using the cash method and must change to the accrual method, effective for the tax year in which the entity fails to meet the test

31
Q

Average, annual gross receipts are determined by:

A

Adding the gross receipts for the three preceding tax years and dividing the total by three.

*If a business has been in existence for less than three years, then the applicable average gross receipts will be determined based on the applicable number of years in existence.

32
Q

12-month rule: A cash-basis taxpayer is not required to capitalize amounts paid for periods that do not extend beyond the earlier of the following:

A
  • 12 months after the benefit begins
  • The end of the tax year after the tax year in which payment was made
33
Q

Under the accrual method, income is generally reported when one or more of the following occurs:

A
  • Payment is received
  • The taxpayer earns the income
  • The income is due to the taxpayer
  • When the title (ownership) of products sold has passed
34
Q

The following restrictions apply to taxpayers using the hybrid accounting method:

A
  • If an inventory is necessary to account for income, and the business does not qualify as a “small business”, the business must use the accrual method for purchases and sales. The cash method can be used for other income and expense items
  • If an entity uses the cash method for reporting income, it must use the cash method for reporting expenses
  • If an entity uses the accrual method for reporting expenses, it must use the accrual method for reporting income.
35
Q

Prior IRS consent is not required to make the following accounting changes:

A
  • Making an adjustment in the useful life of a depreciable or amortizable asset (but a taxpayer cannot change the recovery period for MARCS or ARCS property)
  • Correcting a math error or an error in figuring tax liability
  • A change in accounting method when the change is required by tax law, such as when a business’s average gross receipts exceed $27 million in 2022. A required change from cash to an accrual method of accounting is an automatic change.
36
Q

Unclaimed depreciation: When can you finally claim it and what is the de minimis rule?

A
  1. You can claim it using 481(a) and it reduces your income in the year of change
  2. de minimis rule: If the entire adjustment is less than $25,000, a de minimis rule permits taxpayers to take 100% of the amount into account in the year of change
37
Q

Taxpayers that meet the $27 million gross receipts test in 2022 are not required to account for inventories, but rather may use a method of accounting for inventories that either:

A
  • Treats inventories as non-incidental materials and supplies
    or
  • Conforms to the taxpayer’s financial accounting treatment of inventories
38
Q

Who do UNICAP rules apply to?

A

Producers of tangible and intangible personal property, and producers of real property, as well as business that acquires wholesale inventory for resale.

39
Q

If a business is subject to the UNICAP rules, the taxpayer’s inventory should include all of the following, if applicable

A
  • Merchandise or stock in trade
  • Raw materials, work in process, finished products
  • Supplies that physically become a part of items for sale (labels, stickers, boxes)
40
Q

UNICAP: Inventory may also include:

A
  • Purchased merchandise if the title has passed to the taxpayer, even if the merchandise is still in transit or the business does not have physical possession of it for another reason
  • goods under contract for sale that have not yet been applied to the contract
  • Goods held for sale in display rooms or booths located away from the taxpayer’s place of business
  • Intangible cost (examples include film or video production)
41
Q

UNICAP: The following items are never included in inventory:

A
  • Goods the business has sold if the legal title has passed to the buyer
  • Goods consigned to the business (but not owned by the business)
  • Goods ordered for future delivery, if the business does not yeat have the legal title
  • Land buildings, and depreciable equipment that are used in the business are never included in the calculation of inventory
42
Q

What does COGS stand for?

A

Cost of goods sold

43
Q

How is COGS calculated?

A

by adding up the cost of goods available minus any ending inventory.

44
Q

The following expenses related to inventory sol are included in the calculation of COGS:

A
  • The cost of products or raw materials, including freight
  • Items purchased for resale
  • Storage costs of raw materials and finished products
  • Labor costs to produce the goods
  • Factory overhead
45
Q

COGS Equation:

A

Beginning Inventory + Inventory Purchases and production cost - ending inventory= COGS

46
Q

What is FOB Destination?

A

The title passes to the buyer at the point of destination (when the goods arrive at the buyer’s location)

47
Q

What is FOB Shipping Point?

A

The title passes to the buyer at the point of shipment (when the goods leave the seller’s premises)

48
Q

Does the IRS require a business to use any specific type of inventory method?

A

No, but it does require the business to request permission later if they decide to switch from one accounting method to another.

49
Q

Average Unit Cost =

A

(Cost of Units Purchased or Manufactured)/(Total Quantity of Units)

50
Q

Aggregate Inventory Cost =

A

(Average Unit Cost) x (Units in Current Inventory)

51
Q

FIFO: Unit Cost Per Item =

A

(Cost/Quantity) of the most recent lot of items purchased/produced

52
Q

FIFO: Aggregate Inventory Cost =

A

(Unit Cost Per Item x Quantity) for each item

53
Q

LIFO: Unit Cost Per Item =

A

(Cost/Quantity) for the oldest lot of the item that was purchased

54
Q

LIFO: Aggregate Inventory Cost =

A

(Unit Cost Per Item x Quantity) for each item

55
Q

FIFO/LIFO: During inflation

A

FIFO
+ Higher value of inventory
- Lower cost of good sold

LIFO
- Lower value of inventory
+hihger cost of goods sold

56
Q

FIFO/LIFO: During Deflation

A

FIFO
- Lower value of inventory
+ Higher cost of goods sold

LIFO
- Higher Value of inventory
+ Lower cost of goods sold

57
Q
A

EA PART 2 (23 decks)

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