TASC Accounting Level 3 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting equation

Assets equal liabilities plus equity. Every transaction affects at least two elements and keeps the equation in balance, which is the basis of double-entry bookkeeping.

Accrual basis

Revenue is recorded when earned and expenses when incurred, not when cash changes hands. It matches costs with the revenues they help generate in the same period.

Straight-line depreciation

An equal depreciation charge each year, calculated as cost minus residual value divided by useful life. It suits assets whose benefits are consumed evenly over time.

FIFO inventory valuation

First-in, first-out assumes the oldest inventory costs are charged to cost of sales first, leaving recent costs in closing inventory. In rising prices it reports higher profit than LIFO.

Net realisable value

The estimated selling price in the ordinary course of business less the estimated costs of completion and sale. Inventory is written down to NRV when NRV is below cost.

Trial balance limitation

A trial balance proves debits equal credits but cannot detect errors such as omitted transactions, duplicated entries, or compensating errors that keep the totals equal.

Current liability

An obligation expected to be settled within twelve months of the reporting date or within the normal operating cycle, such as trade payables, accruals, and short-term borrowings.

Bank reconciliation purpose

It explains the difference between the cash book balance and the bank statement by identifying timing differences such as outstanding cheques and deposits in transit, plus unrecorded bank items.

Product versus period costs

Product costs, including direct materials, direct labour, and production overhead, attach to inventory until sold. Period costs such as administration are expensed in the period incurred.

High-low method

A technique that estimates the variable cost per unit from the change in total cost divided by the change in activity between the highest and lowest activity levels.

Overhead absorption rate

Budgeted production overhead divided by budgeted activity such as labour hours or machine hours. It allocates indirect production costs to products for inventory valuation.

Over-absorption

Occurs when overhead absorbed into production exceeds overhead actually incurred. The excess is credited to cost of sales, reducing the expense reported for the period.

Contribution margin

Selling price per unit minus variable cost per unit. It contributes first toward covering fixed costs, and any surplus becomes profit.

Break-even point

The sales volume at which total contribution equals total fixed costs, giving zero profit. In units it equals fixed costs divided by contribution per unit.

Margin of safety

Budgeted or actual sales minus break-even sales, expressed in units or as a percentage of budgeted sales. It measures how far sales can fall before a loss arises.

Relevant cost

A future, incremental cash flow that differs between alternatives. Sunk costs, allocated common fixed costs, and non-cash items are excluded from decision making.

Equivalent units

A measure in process costing that converts partially completed work in progress into the number of fully completed units it represents, using the percentage of completion.

Material price variance

Standard price minus actual price, multiplied by actual quantity purchased. A positive result is favourable because materials cost less than the standard.

Segregation of duties

An internal control that separates authorisation, recording, and custody of assets among different employees so that no single person can both commit and conceal an error or fraud.

COSO control components

The five elements of internal control: control environment, risk assessment, control activities, information and communication, and monitoring activities. They provide a framework for evaluating control systems.

Batch control totals

Totals such as record counts, hash totals, and financial totals computed before and after batch processing. Comparing them detects lost, duplicated, or altered transactions.

Authentication versus authorisation

Authentication verifies a user's identity through passwords or tokens. Authorisation then determines which actions and data that verified user is permitted to access.

Check digit

An extra digit calculated from the other digits of a code and appended to it. Recalculation on input detects keying and transposition errors in account or item numbers.

General versus application controls

General controls apply across all systems, covering access, change management, and backup. Application controls apply to specific processes such as input validation and output distribution.

Grandfather-father-son backup

A rotation scheme keeping three generations of backup files: the most recent, the previous, and the oldest. It allows recovery if the latest backup is corrupted.

Range check

An input validation control that rejects data falling outside predetermined upper and lower limits, such as an hourly pay rate above a set maximum.

Net present value

The present value of a project's cash inflows minus its initial investment, discounted at the cost of capital. A positive NPV means the project adds value.

Internal rate of return

The discount rate that makes a project's net present value equal to zero. A project is acceptable when its IRR exceeds the required rate of return.

Payback period

The time required for cumulative cash inflows to equal the initial investment. It measures liquidity recovery but ignores cash flows after payback and the time value of money.

Weighted average cost of capital

The blended required return on a firm's debt and equity, weighted by their market values. Debt is adjusted for the tax deductibility of interest.

Dividend growth model

Cost of equity equals next year's dividend divided by the current share price, plus the expected dividend growth rate. It assumes growth is constant in perpetuity.

Gearing ratio

A measure of financial risk calculated as debt divided by debt plus equity, or debt divided by equity. Higher gearing raises the return required by shareholders.