1. Chapter 11 Accounting Periods and Methods

2. Learning Objectives Explain the rules for adopting and changing an accounting period Explain the differences among cash, accrual, and hybrid accounting Determine whether specific costs must be included in inventory

3. Learning Objectives Determine the amount of income to be reported from a long-term contract Compute the gain to be reported from an installment sale Compute the amount of imputed interest in a transaction Determine the tax treatment of duplications and omissions that result from changes of accounting methods

4. Accounting Periods Required payments and fiscal years Returns for periods of less than 12 months – May be required to file a short period return – Must annualize their taxable income

5. Accounting Periods Generally need IRS approval to change accounting period Business has to establish a substantial business purpose to change accounting period IRS approval is not necessary – Conformity between newly married spouses – Change to a 52/53 week year ending in the same calendar month as the prior tax year – Certain corporation which have not changed accounting periods within 10 years

6. Overall Accounting Methods Cash receipts and disbursements method Accrual method Hybrid method

7. Cash Receipts And Disbursements Cash receipts and disbursements method – Report income for the tax year in which payments are received – Expenses deducted in the year paid – Most individuals and many service businesses use the cash method

8. Accrual Method Report income and deduct expenses under the all-events and economic performance test Taxpayer’s right to receive income and can be determined with reasonable accuracy

9. Accrual Method Deduction is met when liability is established and the amount of expense can be determined with reasonable accuracy Economic performance occurs when property or services are actually rendered by the other party

10. Hybrid Method Use the accrual method for sales and purchases, but may use cash method for other income and expenses Least used method

11. Inventories Determination of inventory cost – Lower cost or market – LIFO must value at cost – Uniform capitalization rules

12. Inventories LIFO – Preferable for tax purposes – Record-keeping for LIFO is difficult

13. Special Accounting Methods Long-term contracts Installment sales method Deferred payment sales

14. Long-term Contract Accounting Methods Completed contract method only available – For contracts expected to take less than 2 years – For certain home construction

15. Long-term Contract Accounting Methods Percentage of completion method – Reported in each year of contract based on estimated percentage of completed work – Any taxpayer may use – Only available for Contracts entered into before July, 11 1989 Certain residential contracts

16. Imputed Interest Imputed interest computation Accrual of interest Gift, shareholder, and other loans

17. Changes In Accounting Method Accounting period is chosen by using for the first year in which it is applicable – IRS approval is required to change methods – May change to LIFO method without IRS approval

18. Changes In Accounting Method Amount of change Reporting the amount of change – The amount – Change voluntary or involuntary – Any specific statutory mandates Obtaining IRS consent

19. Tax Planning Considerations Accounting periods Accounting methods Installment sales

20. Compliance and Procedural Considerations Installment Sales reported on Form 6252 Procedures for changing to LIFO Obtaining IRS consent.