BB AD Exam key terms

An accounting method that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It matches costs with the benefits they produce and underpins generally accepted reporting.

A liability recorded when a customer pays in advance for goods or services not yet delivered. The balance is reduced and revenue recognized as the obligation is satisfied over time.

The rules governing when and how much revenue a company reports. Under the five-step model, revenue is recognized as control of promised goods or services transfers to the customer.

The convention that expenses should be reported in the same period as the revenues they helped generate. It drives accruals, depreciation, and inventory cost-flow decisions in periodic reporting.

The systematic allocation of a long-lived asset's depreciable cost over its useful life. Common methods include straight-line, declining balance, and units of production, each producing different periodic expense patterns.

A write-down that occurs when an asset's carrying amount exceeds its recoverable or fair value. The loss is recognized in current earnings and reduces the asset's reported balance.

An intangible asset representing the excess of purchase consideration over the fair value of identifiable net assets acquired in a business combination. It is not amortized but tested periodically for impairment.

The process of combining a parent and its controlled subsidiaries into a single set of financial statements. Intercompany balances and transactions are eliminated so the group reports as one economic entity.

A method for accounting for significant influence investments, typically 20 to 50 percent ownership. The investor records its share of investee earnings and adjusts the carrying amount for dividends received.

Sales revenue minus all variable costs. It measures how much each unit or dollar of sales contributes toward covering fixed costs and generating operating profit.

The sales volume or revenue level at which total revenues equal total costs, yielding zero operating income. It is computed as fixed costs divided by the unit contribution margin.

The amount by which actual or budgeted sales exceed the break-even level, expressed in units, dollars, or percentage. It indicates how far sales can fall before a loss occurs.

A future cost that differs between decision alternatives. Sunk costs and costs identical across options are excluded because they cannot change the choice made.

The benefit forgone by choosing one alternative over the next best option. It is relevant to decision making even though it never appears in accounting records.

A cost already incurred that cannot be recovered or changed by any future decision. It should be ignored in evaluating alternatives because it is irrelevant to the outcome.

A system that assigns predetermined costs to materials, labor, and overhead, then compares them with actual results. Variances highlight inefficiencies and support performance evaluation and budgeting.

The process of decomposing differences between budgeted or standard amounts and actual results into price and quantity components. It helps managers identify causes of overspending and take corrective action.

A budget adjusted to the actual level of activity achieved. Comparing it with actual costs isolates spending variances from volume effects that would distort a static budget.

A costing method that assigns overhead to products based on the activities they consume, using multiple cost drivers. It improves accuracy where products differ in complexity and resource demands.

A factor that causes or correlates with changes in the cost of an activity, such as machine hours, setups, or orders. It serves as the allocation base in activity-based costing systems.

The sum of a project's expected cash flows discounted at the required rate of return, minus the initial investment. A positive result suggests the project adds value to the firm.

The discount rate that makes a project's net present value equal to zero. It is compared with the hurdle rate to decide whether an investment is acceptable.

The blended after-tax cost of a firm's debt and equity, weighted by their proportions in the capital structure. It is commonly used as the discount rate for evaluating investments.

The mix of debt and equity a company uses to finance its assets. The choice affects financial risk, cost of capital, and returns available to shareholders.

The use of fixed costs, whether operating or financing, to magnify changes in profit. Higher leverage increases expected returns but also amplifies downside risk.

Current assets minus current liabilities, representing short-term liquidity available to run operations. Managing it involves balancing inventory, receivables, and payables efficiently.

The number of days from paying suppliers for inventory to collecting cash from customers. It combines days inventory outstanding, days sales outstanding, and days payables outstanding.

A conflict of interest arising when managers pursue their own goals rather than those of shareholders. Governance mechanisms such as incentives and monitoring are used to reduce it.

A legal obligation of directors and officers to act in the best interests of the corporation and its shareholders. It includes duties of care and loyalty, requiring informed decisions and avoiding self-dealing.

Buying or selling securities while in possession of material nonpublic information, or tipping others who trade on it. It violates securities laws and can lead to civil and criminal penalties.

The process of filing required disclosures with a securities regulator before offering securities to the public. It aims to give investors accurate information and generally requires a prospectus.

A measure of how responsive quantity demanded is to a change in price. Demand is elastic when the percentage change in quantity exceeds the percentage change in price.

The additional revenue earned from selling one more unit of a good or service. Profit is maximized where marginal revenue equals marginal cost.

A sustained increase in the general price level, reducing the purchasing power of money. Central banks often respond by raising interest rates to restrain demand.

Actions by a central bank to influence money supply and interest rates in pursuit of price stability and economic growth. Tools include open market operations and reserve requirements.

The policies and procedures designed to safeguard assets, ensure reliable reporting, and promote compliance with laws. Effective controls rely on segregation of duties and independent verification.

An internal control principle that separates authorization, custody, and recordkeeping among different people. It reduces the risk that one individual can both commit and conceal an error or fraud.

The use of systematic techniques to examine data sets for patterns, anomalies, and insights. In auditing and management, it supports risk assessment, testing, and decision making.