Final answer:
The statement is true; a newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid method. Partnerships have the flexibility to select the method that best fits their business needs, but they must use the method consistently and obtain IRS approval to change it.
Step-by-step explanation:
The statement that a newly formed partnership may adopt either the cash or accrual method of accounting or a hybrid of these two methods is true. A partnership is free to choose the accounting method that best suits its business upon formation.
The cash method recognizes revenue and expenses when they are actually received or paid, whereas the accrual method recognizes revenue when earned and expenses when incurred, regardless of when the transaction in cash occurs. A hybrid method combines elements of both accrual and cash accounting.
For instance, a partnership could use the accrual method for tracking inventory and the cash method for other income and expenses. This flexibility allows partnerships to choose the most advantageous accounting method for tax and financial reporting purposes. However, once an accounting method is adopted, the partnership must continue to use it consistently and may need IRS approval to change the method later on.