CPA (ABC) flashcards
CPA · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Audit risk model
- A formula expressing audit risk as inherent risk times control risk times detection risk; the auditor controls detection risk through the nature, timing, and extent of procedures.
- Reasonable assurance
- A high but not absolute level of assurance that the auditor obtains sufficient appropriate evidence to reduce audit risk to an acceptably low level.
- Materiality
- The amount of misstatement that would influence the economic decisions of users of the financial statements; it is a matter of professional judgment.
- Going concern
- The assumption that an entity will continue in operation for the foreseeable future; if substantial doubt exists, the auditor evaluates management's plans and disclosure.
- Unmodified opinion
- An auditor's conclusion that the financial statements present fairly, in all material respects, the financial position in accordance with the applicable financial reporting framework.
- Material weakness
- A deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected timely.
- External confirmation
- A direct written response from a third party to the auditor, used to obtain evidence about account balances such as receivables or bank balances.
- Independence in fact
- The auditor's state of mind being unbiased and objective; independence in appearance is the perception by a reasonable third party that the auditor is independent.
- Return on equity
- Net income divided by average shareholders' equity; it measures the return generated on the owners' investment in the entity.
- DuPont analysis
- A decomposition of return on equity into net profit margin, asset turnover, and equity multiplier, showing the drivers of profitability.
- Net present value
- The present value of a project's incremental cash inflows minus the present value of its outflows, discounted at the required rate of return.
- Internal rate of return
- The discount rate at which a project's net present value equals zero; a project is acceptable when the IRR exceeds the hurdle rate.
- Break-even point
- The sales volume at which total revenues equal total costs; in units it equals fixed costs divided by contribution margin per unit.
- Degree of operating leverage
- Contribution margin divided by operating income; it measures the sensitivity of operating income to a change in sales.
- Capital asset pricing model
- A model that computes required return as the risk-free rate plus beta times the market risk premium; it prices systematic risk.
- Weighted average cost of capital
- The average cost of a firm's debt and equity, weighted by their market-value proportions and used as a discount rate.
- Revenue recognition five steps
- Identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when obligations are satisfied.
- Performance obligation
- A promise to transfer a distinct good or service to a customer; revenue is recognized when the obligation is satisfied.
- Equity method
- An accounting method for investments giving significant influence; the investor records its share of investee earnings and reduces the investment for dividends.
- Goodwill
- The excess of consideration transferred over the fair value of identifiable net assets acquired; it is not amortized but tested annually for impairment.
- Right-of-use asset
- An asset recognized by a lessee representing its right to use an underlying asset for the lease term, measured at the present value of lease payments.
- Deferred tax liability
- A liability arising from a temporary difference that will result in taxable amounts in future periods when the related asset or liability is recovered or settled.
- Net realizable value
- The estimated selling price in the ordinary course of business less the estimated costs of completion and sale; inventory is written down to this amount.
- Comprehensive income
- The change in equity from transactions and other events from non-owner sources; it includes net income plus other comprehensive income.
- Gross income
- All income from whatever source derived unless specifically excluded by the Internal Revenue Code, such as gifts and inheritances.
- Capital loss limitation
- Net capital losses may be deducted against ordinary income up to $3,000 per year ($1,500 for married filing separately); excess carries forward.
- Section 179 deduction
- An election allowing a taxpayer to deduct the cost of qualifying property in the year placed in service, subject to a dollar limit and phase-out.
- S corporation requirements
- An S corporation may have no more than 100 shareholders, only eligible individuals and certain trusts, and one class of stock.
- Substantial authority
- A tax return position standard that is stronger than reasonable basis but weaker than more likely than not; it can avoid the accuracy-related penalty.
- Like-kind exchange
- An exchange of real property held for productive use or investment in which gain is deferred to the extent no boot is received.
- Statute of limitations
- The period within which the IRS may assess tax, generally three years from filing, or six years if gross income is understated by more than 25%.
- Business judgment rule
- A legal principle protecting directors from liability for decisions made in good faith, with reasonable care, and in the best interest of the corporation.