I. Analyze the cash method
In the case of Jim Turin & Sons, Inc., “the taxpayer used cash method for tax purposes, which resulted in takin deductions for the cost of the asphalt for a job immediately upon its payment to its sister corporation and recognizing income for a job when it receives payments.” (Turin, 2000). The cash method of accounting requires that sales be recognized when cash is received from a customer, and that expenses are recognized when payments are made to suppliers. It is possible under the cash method to alter reported earnings, which is why the IRS is suspicious of its use (though the IRS still allows it). Examples of cash method manipulation are: “Revenue. A business receives a check from a customer near the end of …show more content…
Using the accrual method would truthfully mirror the taxpayer’s income. The accrual method measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. “This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.” (Accrual Accounting , n.d.) The Commissioner determined that the asphalt was “merchandise” under Treas. Reg. S 1.47-1, where taxpayer had inventories and was required to use the accrual …show more content…
Summarize the key points
Some key points that determined revenue recognition are:
• § 1.471–1 Need for inventories - Inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor. The inventory should include all finished or partly finished goods and, in the case of raw materials and supplies, only those which have been acquired for sale or which will physically become a part of merchandise intended for sale.
• 26 U.S. Code § 471 - General rule for inventories – “Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.” (26 U.S. Code § 471 - General rule for inventories,