Computer Consultants Inc, began business as an adviser to chains of retail stores. The company assisted the stores in the selection of hardware and the development of software used by retail chain stores. Later the company developed software and sold it
to its customers. The company also began selling some of the equipment to the customers. That is, the company would bid on a job to purchase and install equipment and the software. The company has consistently reported its income by the cash method. At the end of the year, the company has substantial accounts receivables from clients and a small amount of inventory on hand. What advice can you offer the company regarding its accounting method?
Inventories are an income-producing factor for the business. Therefore, the company is required to use the accrual method of accounting. The company should voluntarily change to the accrual method, before the IRS requires the change. With a voluntary change, the company can avoid penalties and interest. Also, the company will be allowed to spread the gain over the current year and the three following years.
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