EA2 Study Unit 01 - Entity Types, Methods, and Periods

A business entity owned by one individual, not separate from the owner.

Owner's personal assets are at risk for business debts.

Form used to report income/loss for a sole proprietorship.

A sole proprietorship cannot be transferred like a corporation.

Option for spouses to report income as sole proprietors.

Annual accounting period for taxable income reporting.

Rules for timing of income and expense reporting.

A legal entity separate from its owners, providing limited liability.

Individuals or entities that own shares in a corporation.

A type of corporation that meets specific Internal Revenue Code requirements and avoids double taxation.

A standard corporation structure where the business is taxed separately from its owners.

An accounting method where income is reported when received and expenses are deducted when paid.

An accounting method that records income when earned and expenses when incurred, regardless of cash flow.

Permission from the Internal Revenue Service required for certain tax-related decisions.

Income is recognized when rights to receive it are fixed and can be accurately determined.

Income rights not fixed if contingent on future events.

John can only recognize $5,000 income in 2023 from a $10,000 bonus due to conditions.

An income recognition test satisfied when goods are sold, confirming income is earned.

Generally included in income when received, even under cash or accrual methods.

Prepaid rent must be included in income when received, applicable to any taxpayer method.

Income from merchandise sales is recognized when goods are shipped and rights are earned.

Prepaid income for services can be accrued over the service period if short-term.

An accounting method where income and expenses are recorded when earned or incurred, not when cash is received or paid.

A method allowing certain taxpayers to estimate bad debts based on past experiences with uncollectible accounts.

An expense representing the amount of accounts receivable expected to be uncollectible.

Occurs when services are performed or when property is provided, used, or paid for.

A liability can be deducted when the obligation is established and amounts can be accurately determined.

A part of liabilities that involves disagreement but can deduct any paid portion, even if contested.

The combination of accounting methods that clearly reflects income and is used consistently.

Under hybrid methods, the accrual method must be used for inventory purchases and sales.

Method of inventory cost calculation based on average costs.

Difference between rolling average cost and actual cost, expressed as a percentage.

Used in retail inventory method to relate cost to retail selling price.

Valuation technique for ending inventory based on the cost-to-retail ratio.

Ownership of goods transfers to buyer once shipped.

Seller retains ownership until goods reach destination.

Measure of how often inventory is sold and replaced over a period.

Ratio used to convert retail prices to estimated costs.

Inventory that is held by one party, but owned by another, included in ending inventory.

Inventory treated as non-incidental materials for taxpayers using cash method under gross receipts test.

Materials tracked and accounted for; costs deducted in the year of use.

Methods not allowed, like deducting reserves or using nominal prices for inventory.

Deducting reserves for potential value changes in inventory is not allowed.

Failing to include all stock on hand in valuation is unacceptable.

Costs not directly tied to production, treated as period costs under certain methods.

Annual period convention chosen for income record keeping, either calendar or fiscal.

An inventory valuation method comparing market value and cost, using the lower.

If inventory is material, the accrual method must be used for sales and purchases.

Using cash for expenses and accrual for income requires different approaches; must maintain consistency.

Taxpayers cannot deduct reserves for price changes or estimate depreciation on inventory.

Combination of methods must clearly reflect income and be consistently used.

If inventory is used, the accrual method is required for purchases and sales.

Includes invoice price minus trade discounts, but not cash discounts.

Cannot freely switch between cost and lower-of-cost-or-market methods.

Adopt LIFO by filing Form 970 or a statement with required info.

Cash discounts can be deducted at taxpayer's option but do not affect COGS.

Deducting reserves or estimates for depreciation in inventory lacks IRS recognition.

Different businesses owned by the same taxpayer can use different accounting methods.