We're going to tell you the definition of this one and you're going to complain "well, that's kind of obvious." Maybe. But, would you really prefer if it was confusing? Would you prefer if it was called "Mean Inventory Outlay Accounting Methodical Process (MIOAMP)." We thought not.
Anyway, the average cost method represents a way to record the value of inventory on a balance sheet. As the name implies, you divide the total cost of the inventory by the amount you have in stock. So each piece of inventory is recorded at the average price of all the inventory (this way you don't have to track specific costs for individual inventory pieces).
You own a company that installs entertainment systems. You keep a bunch of TVs in stock for rush jobs. However, sometimes you get a deal on the TVs. Sometimes you don't.
So you have five TVs in stock that cost you $500 each, you have three in stock that cost you $600, and two from way back before you knew how to negotiate that cost you $1,000 each. The total cost of all the TVs is $6,300, and there are 10 TVs in stock. So average cost of the TVs is $630 each. When one of them is sold, you subtract $630 from the inventory on the balance sheet, regardless of which specific TV was installed and what its original cost was.
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Finance: What is Tax Basis?8 Views
Finance allah shmoop What is tax basis Well your basis
is your cost Your costs for assessing how much you
owe when the tax man coming you bought a thousand
shares of whatever dot com at twelve bucks a share
in its eye po and huzzah Three years later the
stock is at thirty You decide whatever dot com is
now passe because a kardashians said so it'll be over
taken by whenever dot com and you want to sell
So you dio and you live in a thirty percent
marginal tax blue state And that is your federal tax
rates in twenty percent But then you add in ten
percent for state taxes and whatever's left for obamacare and
you pay about thirty percent tax on your gains Well
you paid twelve grand to buy the stock and after
the sale you took in thirty grand when you sold
it for a gain of eighteen thousand dollars Your tax
basis on those shares is twelve grand so you pay
thirty percent tax on the eighteen grand of gain or
fifty four hundred dollars to net from the sale of
thirty thousand dollars worth of stock How much Yeah twenty
Four thousand six hundred dollars He fancy math Had you
just gotten those shares free I'ii they were gifted to
you and you had no tax basis or a tax
basis of zero dollars a share Well then your gain
would have been from zero to thirty grand or a
gain of thirty thousand dollars to then be taxed at
thirty percent or nine grand in taxes to net just
twenty one thousand dollars after the sale So having ah
high tax basis or at least being able teo point
toe one saves you money when the tax man coming
and well that's pretty much it alright he's gone Now
you can all come out Come on it's Okay it's 00:01:53.698 --> [endTime] safe
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