WACE Accounting Finance ATAR 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 preserves this equality through double-entry recording, so the statement of financial position always balances after all postings and adjustments.

Accrual basis

Revenue is recorded when earned and expenses when incurred, regardless of cash timing. This differs from cash basis, which records transactions only when cash changes hands.

Straight-line depreciation

Annual expense equals cost minus residual value, divided by useful life. It allocates the depreciable amount evenly across periods and produces a constant charge each year.

Trial balance

A list of all ledger account balances at a point in time, with debits and credits in separate columns. Equal totals confirm arithmetic accuracy only, not the absence of errors.

Contribution margin

Sales revenue minus variable costs. It measures the amount available to cover fixed costs and generate profit, and is central to break-even and short-term decision analysis.

Break-even point

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

High-low method

A cost estimation technique using the highest and lowest activity levels. Variable cost per unit equals the change in cost divided by the change in activity.

Absorption costing

A product costing method that includes direct materials, direct labour, variable overhead and fixed overhead in product cost. It differs from variable costing, which excludes fixed overhead.

Current ratio

Current assets divided by current liabilities. It measures short-term liquidity, indicating whether an entity can meet obligations falling due within the next twelve months.

Return on equity

Net profit divided by average equity, expressed as a percentage. It measures the return generated for owners on the capital they have invested in the business.

Gross profit ratio

Gross profit divided by sales revenue, expressed as a percentage. It shows the margin remaining after cost of sales to cover operating expenses and contribute to profit.

Vertical analysis

A technique expressing each financial statement item as a percentage of a base figure, such as sales or total assets, to reveal relative composition and structure.

Net present value

The sum of discounted future cash flows minus the initial investment. A positive NPV indicates the project adds value at the required rate of return.

Weighted average cost of capital

The average cost of a firm's financing sources, weighted by their proportions in the capital structure. It is the minimum return required on average-risk investments.

Payback period

The time required for cumulative cash inflows to recover the initial investment outlay. It ignores cash flows after payback and the time value of money.

Gearing ratio

A measure of financial leverage, often debt divided by total capital or equity. Higher gearing increases fixed interest obligations and financial risk to shareholders.

Primary market

The market in which new securities are issued and sold to investors for the first time, raising capital for the issuer through instruments such as shares or bonds.

Monetary policy

Central bank actions managing the money supply and interest rates, typically targeting inflation. In Australia the Reserve Bank targets inflation of two to three per cent.

ASIC

The Australian Securities and Investments Commission. It regulates market conduct, disclosure, licensing and consumer protection in financial services rather than prudential soundness.

Market efficiency

The degree to which security prices reflect available information. Weak form covers past prices, semi-strong covers public information and strong covers all information.

Opportunity cost

The value of the next best alternative forgone when a choice is made. It is a relevant cost in decision-making even though no cash payment occurs.

Sunk cost

A past cost that cannot be recovered and does not differ between alternatives. It is irrelevant to incremental decisions and should be excluded from analysis.

Compound interest

Interest calculated on both the original principal and accumulated interest. Future value equals present value multiplied by one plus the interest rate raised to the number of periods.

Effective annual rate

The true annual cost or return after accounting for compounding frequency. It equals one plus the nominal rate divided by periods, raised to the periods, minus one.

Relevant cost

A future cost that differs between decision alternatives. Only relevant costs should be included when comparing options such as accepting a special order or making versus buying.

Flexible budget

A budget restated at the actual activity level achieved. It allows fair comparison of actual costs with what costs should have been at that volume.

Interest cover

Earnings before interest and tax divided by interest expense. It indicates how many times profit can cover interest obligations, signalling solvency risk.

Cash conversion cycle

Days inventory plus days receivables minus days payables. It measures how long cash is tied up in operating activities before collection from customers.

Internal rate of return

The discount rate at which a project's net present value equals zero. A project is acceptable when its IRR exceeds the required rate of return.

Capital structure

The mix of debt and equity used to finance a firm's assets. It affects the cost of capital, financial risk and returns available to shareholders.

Prudential regulation

Supervision of financial institutions' capital, liquidity and risk management to protect depositors and system stability, carried out in Australia by APRA.

Ethical dilemma

A situation where competing values or duties make the right course of action unclear. Resolution requires identifying stakeholders, duties, consequences and professional standards.