Q: We see an adjustment on the statements attached to Schedule M-1 called "Cash to Accrual". Is this the same as the net between revenue and expenses for uncompleted contracts?
A: No. Such a statement usually signals a lump sum adjustment to bring a cash-based income statement into conformity with the accrual statement. The borrower likely prepared the tax returns on a cash basis and the accountant made a single adjustment to reconcile the two statements. A statement like this needs to be explored in more depth because it rarely indicates which revenue or expense accounts need to be adjusted to move from cash to accrual. Adjustments for uncompleted contracts, however, would identify specific adjustments to revenue or to expenses or to both.
We will discuss cash-based business income tax returns, including the conversion of a cash-based income statement to an accrual income statement prepared according to GAAP, in Session 8, Cash Based Income Tax Returns.
Course overview: Schedule M-1 and the Accrual Income Statement