adjusted basis

(noun)

The net cost of an asset after adjusting for various tax-related items.

Related Terms

Examples of adjusted basis in the following topics:

  • The Efficient Market Hypothesis

    • The efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient. " In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.
    • In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information.
    • To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous.
    • To test for this, consistent upward or downward adjustments after the initial change must be looked for.
    • If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and, hence, in an inefficient manner.

  • Risk Adjusting the Discount Rate

    • Discount rates are adjusted on an investment to investment basis, as different investments encounter different degrees of risk that must be considered when determining equitable returns.
    • It is at this point that the logic behind adjusting discount rates becomes practical.
    • Adjusting this for the risk-adjusted discount rate is a simple modification, where each future cash flow is multiplied by the estimated likelihood of its occurrence.
    • With this increase in risk, the discount rate can now be risk-adjusted accordingly.
    • Realize the reasoning behind adjusting discount rates for risk, and the way this impacts the cost of capital

  • Balance Sheet Analysis

    • Balance sheet analysis consists of 1) reformulating reported Balance sheet, 2) analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and adjusted Balance sheet.
    • The two first steps are often dropped in practice, meaning that financial ratios are just calculated on the basis of the reported numbers, perhaps with some adjustments.
    • Financial ratio analysis should be based on regrouped and adjusted financial statements.
    • Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.

  • Managing to Prevent Fraud

    • To meet financial goals for the company managers may be tempted to "cook the books. " To help prevent management from adjusting financial statements, an independent auditor should examine financial statements on an annual basis.
    • To meet financial goals for the company managers may be tempted to "cook the books. " To help prevent management from adjusting financial statements, an independent auditor should examine financial statements on an annual basis.

  • LIFO Method

    • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
    • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.
    • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
    • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.

  • Preparation of the Statement of Cash Flows: Direct Method

    • In this method, each item on an income statement is converted directly to a cash basis, and each cash effect is directly reported.
    • In the indirect (addback) method for calculating cash flows, the accrual basis net income is established first.
    • This net income is then indirectly adjusted for items that affected the reported net income but did not involve cash.
    • The indirect method adjusts net income (rather than adjusting individual items in the income statement) for the following phenomena: changes in current assets (other than cash), changes in current liabilities, and items that were included in net income but did not affect cash.

  • Preparation of the Statement of Cash Flows: Indirect Method

    • The indirect method starts with net-income while adjusting for non-cash transactions and from all cash-based transactions.
    • The indirect method adjusts net income (rather than adjusting individual items in the income statement) for:
    • The indirect method uses net income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions.
    • This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.
    • The indirect method adjusts net income (rather than adjusting individual items in the income statement).

  • Bureaucratic Control

    • PDCA (plan–do–check–act or plan–do–check–adjust) is a four-step management method used in business to control and continuously improve processes and products.
    • Act/Adjust: After comparing results, a business takes corrective actions on any significant differences between actual and expected results.
    • It is important to keep in mind that this quality control process is continuous and specifically designed to improve the quality of business processes on an ongoing basis.

  • Recognizing Accounts Receivable

    • If you are operating under the accrual basis, you record account receivable transactions irrespective of any changes in cash.
    • If you are operating under the accrual basis, you record transactions irrespective of any changes in cash.
    • To adjust the allowance account for the new estimate, debit Bad Debt Expense for USD 500 (10,000 *0.05) and credit Allowance for Doubtful Accounts for USD 500.
    • To adjust the allowance account for the new period's estimate, debit Bad Debt Expense for USD 2,000 (20,000 *0.10) and credit Allowance for Doubtful Accounts for USD 2,000.

  • The Argument for Barriers

    • In that context, economists argue that easing adjustment of those harmed is economically more fruitful than protection given the net economic benefit of trade to the total economy.
    • Yet, concurrent with the large expansion of trade over the past 25 years, real wages (i.e., inflation adjusted wages) of American workers grew more slowly than in the earlier post-war period, and the inequality of wages between the skilled and less skilled worker rose sharply.
    • This determination needs to be made on a case-by-case basis since the claim is made by some who do not meet national security criteria.