Andrew owns 100% of the stock of Crow's Farm Inc., an S corporation, that raises cattle and corn. The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.
A)The farm must report its sales and cost of goods sold by the accrual method because inventories are material to the business.
B)The income from the farm may be reported by the cash method.
C)The income from the sales of cattle may be reported by the cash method, but the income from the sales of corn must be reported by the accrual method.
D)The income from the sales of corn may be reported by the cash method, but the income from cattle sales must be reported by the accrual method.
E)None of the above.

Question

Quizplus · Accepted Answer

S corporations with gross receipts under $25 million for the preceding three years may use the cash method of accounting. As the farm's gross receipts have never exceeded $3 million, the cash method may be used to report income. Choice A is incorrect because the fact that inventories are material does not determine whether an entity must use the accrual method. Choice C and D are incorrect because the method of accounting for the sales of cattle and corn must be consistent, and as the farm is eligible to use the cash method, it may use the same method of accounting for all income.

Andrew Owns 100% of the Stock of Crow's Farm Inc