BCS Written Finance flashcards

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

Weighted average cost of capital

The blended required return on a firm's equity and debt, weighted by market values and adjusted for the tax deductibility of interest. It is the discount rate for average-risk projects.

Capital asset pricing model

A model pricing equity as the risk-free rate plus beta times the market risk premium. Beta captures sensitivity to market movements, so only non-diversifiable risk earns a premium.

Net present value

The sum of a project's future cash flows discounted at the cost of capital, minus the initial outlay. A positive NPV means the project adds value to shareholders.

Cash conversion cycle

Days inventory outstanding plus days sales outstanding minus days payables outstanding. It measures how long cash is tied up in operations before customers pay and suppliers are settled.

Financial leverage

The use of debt in the capital structure. It magnifies returns to shareholders and raises the risk of distress because interest must be paid regardless of earnings.

Medium-term expenditure framework

A budgeting tool that sets multi-year sectoral spending ceilings consistent with the fiscal plan. It gives agencies forward estimates and links annual budgets to policy priorities.

Commitment control

A budget execution control that reserves appropriated funds when a contract or purchase order is signed, preventing agencies from overspending before cash is actually disbursed.

Performance budgeting

A budget format that links appropriations to outputs and outcomes rather than only to input line items, allowing assessment of value for money and programme effectiveness.

Fiscal rule

A numerical constraint on fiscal aggregates, such as a deficit-to-GDP ceiling or debt limit. It anchors credibility and limits discretionary overspending by governments.

Accrual accounting

Recording revenue when earned and expenses when incurred, regardless of cash timing. It captures liabilities such as pensions and arrears that cash accounting omits.

Revenue recognition five steps

Identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognise revenue when each obligation is satisfied.

Impairment test

Comparing an asset's carrying amount with its recoverable amount, the higher of fair value less costs to sell and value in use. A write-down follows if carrying amount is higher.

Consolidation control

An investor consolidates an investee when it has power over relevant activities, exposure to variable returns, and the ability to use its power to affect those returns.

Basel III capital ratios

Minimum common equity tier 1 of 4.5 percent of risk-weighted assets, tier 1 of 6 percent and total capital of 8 percent, plus a 2.5 percent conservation buffer.

Liquidity coverage ratio

A Basel standard requiring high-quality liquid assets sufficient to cover 30 days of net stressed cash outflows, ensuring banks survive short-term funding shocks.

Moral hazard in deposit insurance

Insured depositors stop monitoring bank risk, so banks may take excessive risk. Minimum capital requirements and supervision are used to offset this behaviour.

Efficient market hypothesis

The proposition that prices reflect available information. Weak form covers past prices, semi-strong covers public information, and strong form covers all information including private.

Fiscal multiplier

The change in output caused by a one-unit change in government spending or taxes. It is larger when consumption propensities are high and import leakage is low.

Automatic stabilisers

Features such as progressive taxes and unemployment benefits that dampen economic fluctuations without new legislation, because they rise or fall with the cycle automatically.

Crowding out

The reduction in private investment when deficit-financed public borrowing raises interest rates, particularly when the economy is near full capacity.

Tax incidence

The distribution of a tax burden between buyers and sellers. It depends on relative elasticities: the less elastic side of the market bears more of the tax.

Audit risk model

Audit risk equals inherent risk times control risk times detection risk. The auditor lowers detection risk by increasing substantive testing when the other risks are high.

Segregation of duties

Separating authorisation, custody, recording and reconciliation of transactions so that no single person can both perpetrate and conceal an error or fraud.

Three lines model

Management owns and manages risk in the first line, a risk and compliance function monitors in the second, and internal audit gives independent assurance in the third.

Fraud triangle

Three conditions that drive fraud: pressure or incentive, opportunity, and rationalisation. Strong controls mainly reduce opportunity, the element auditors can most influence.

Incremental cash flow

The change in a firm's cash flows attributable solely to a project. Sunk costs are excluded and only incremental overhead is allocated when appraising an investment.

Profitability index

The present value of a project's inflows divided by its initial outlay. It ranks projects under capital rationing, where funds are insufficient for all positive-NPV options.

Real options

The value of flexibility to defer, expand, contract or abandon a project. It is additional to static NPV and is valued using option-pricing techniques.

Nominal and real discounting

Nominal cash flows must be discounted at a nominal rate, and real cash flows at a real rate. Mismatching the two misstates NPV by the expected inflation effect.

Integrated financial management system

A government-wide system linking budgeting, procurement, payment and accounting, enforcing commitment control and producing real-time fiscal reports for treasury oversight.

Maker-checker control

A system control requiring one user to prepare a transaction and another to approve it, preventing unilateral entry of payments or master-data changes.

Recovery point objective

The maximum tolerable data loss measured in time before a disruption. It determines backup frequency, while recovery time objective sets the tolerated downtime.