BB AD Exam 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 recorded transaction keeps this equality intact because each entry debits and credits equal amounts, preserving the balance sheet identity.

Accrual Basis

Revenue is recognized when earned and expenses when incurred, regardless of cash timing. Adjusting entries record accruals and deferrals so reported income reflects economic activity.

Revenue Recognition Steps

Identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, and recognize revenue as each obligation is satisfied.

Lower of Cost or NRV

Inventory is reported at the lower of its cost or net realizable value, the estimated selling price less completion and disposal costs. Write-downs reflect declines in value.

Double-Declining Depreciation

An accelerated method applying twice the straight-line rate to beginning book value each year. Salvage value is ignored until the final year, when book value is limited to salvage.

Finance Lease Criteria

A lessee treats a lease as a finance lease when it transfers ownership, contains a bargain purchase option, covers a major part of asset life, or has payments whose present value is substantially all fair value.

Contribution Margin

Sales minus all variable costs. The unit contribution margin measures how much each unit sold contributes toward covering fixed costs and generating operating profit.

Breakeven Point

The sales volume at which total revenue equals total cost and operating income is zero. In units it equals fixed costs divided by unit contribution margin.

Absorption vs Variable Costing

Absorption costing includes fixed overhead in product cost; variable costing expenses it immediately. Income differences equal fixed overhead deferred in or released from inventory.

Predetermined Overhead Rate

Estimated total overhead divided by estimated allocation base. Applied overhead equals the rate times the actual base; underapplication means actual overhead exceeded applied overhead.

Materials Price Variance

Actual quantity purchased times the difference between actual price and standard price. A positive value is unfavorable because materials cost more than the standard allows.

Relevant Cost

A future cost that differs among the alternatives being considered. Sunk costs and allocated common fixed costs do not differ and are excluded from the decision.

Minimum Transfer Price

For a selling division without spare capacity, variable cost per unit plus the lost contribution margin per unit. This equals the market price when an outside market exists.

Net Present Value

The present value of a project's incremental after-tax cash flows minus its initial investment, discounted at the cost of capital. Positive NPV adds value to the firm.

Weighted Average Cost of Capital

The blended required return on a firm's debt and equity, weighted by market value proportions. Debt is included on an after-tax basis because interest is tax deductible.

Capital Asset Pricing Model

Cost of equity equals the risk-free rate plus beta times the market risk premium. Beta measures systematic risk, the only risk compensated in equilibrium.

Cash Conversion Cycle

Days inventory outstanding plus days sales outstanding minus days payable outstanding. It measures how long cash is tied up between paying suppliers and collecting from customers.

Degree of Operating Leverage

Contribution margin divided by operating income. It indicates the percentage change in operating income for a given percentage change in sales, driven by fixed cost structure.

Residual Dividend Model

Dividends are paid only from earnings left after funding equity needs from retained earnings at the target capital structure. It minimizes external equity issuance.

Statute of Frauds

Requires a signed writing for land contracts, suretyship promises, contracts not performable within one year, and UCC goods sales of $500 or more.

Mirror Image Rule

Under common law, acceptance must match the offer exactly. A response changing terms is a counteroffer, which terminates the original offer and creates a new one.

Apparent Authority

Authority arising when a principal's manifestations lead a third party reasonably to believe an agent is authorized. The principal is bound even without actual authority.

Securities Act of 1933

Governs initial public offerings of securities, requiring registration with the SEC and delivery of a prospectus. It targets disclosure at issuance rather than ongoing trading.

Automatic Stay

A bankruptcy filing immediately halts collection actions, lawsuits, foreclosures, and repossessions against the debtor. Creditors must seek relief from the stay to proceed.

Price Elasticity of Demand

Percentage change in quantity demanded divided by percentage change in price. Demand is elastic when the absolute value exceeds one, so a price rise reduces total revenue.

Profit Maximizing Rule

A firm maximizes profit by producing where marginal revenue equals marginal cost. In perfect competition, price equals marginal revenue, so output expands until price equals marginal cost.

Gross Domestic Product

Total market value of final goods and services produced within a country in a period. The expenditure approach sums consumption, investment, government purchases, and net exports.

Comparative Advantage

A country gains from trade by specializing in goods for which it has the lowest opportunity cost, even when another country holds an absolute advantage in everything.

COSO Internal Control Framework

Five components: control environment, risk assessment, control activities, information and communication, and monitoring. Together they support reliable financial reporting and compliance objectives.

Segregation of Duties

Separating custody of assets, authorization of transactions, and recordkeeping so no single person controls an entire transaction. It reduces the risk of undetected error or fraud.

Predictive Analytics

Analysis using historical data and statistical models to estimate future outcomes such as demand, default risk, or fraud likelihood. It contrasts with descriptive analysis of past events.

Benford's Law Analysis

A digital analysis technique comparing observed leading-digit frequencies with expected logarithmic distributions. Large deviations flag possible fabrication, duplication, or processing errors in transaction populations.