Problem: Moss Company is a computer consulting firm. The company also sells equipment to its clients. The sales of equipment account for approximately 40% of the company's gross receipts. The company has consistently used the cash method to report its income from services and the accrual method to report its income from the sale of inventory. In June of the current year Moss's accountant discovered that as a small business the company qualifies to use the cash method for all of its activities. The company is a calendar year taxpayer. As of the beginning of the current year, the company had $60,000 of inventory on hand and $50,000 of accounts receivable from the sales of equipment and $40,000 of receivables from the consulting services.
Q1. Compute the adjustment due to the change in accounting method
Q2. Is the adjustment positive or negative? Explain.
Q3. When can the adjustment be taken into account in computing taxable income?