CA ANZ Core 1 key terms

An accounting method that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It matches income with the costs that generated it during the same period.

The rule that expenses are recognised in the same period as the revenue they helped produce. It prevents profit from being overstated by pushing costs into later reporting periods.

The criteria determining when income is recorded: a contract exists, performance obligations are identified, the transaction price is set, and control of goods or services passes to the customer.

The assumption that an entity will continue operating for the foreseeable future without liquidation. If the assumption is doubtful, financial statements must disclose the uncertainty and any mitigation plans.

A reduction in the carrying amount of an asset when its recoverable amount falls below book value. The loss is recognised immediately in profit or loss for most assets.

The value at which an asset or liability is recorded in the statement of financial position, after deducting accumulated depreciation, amortisation, or impairment losses.

The systematic allocation of a tangible asset's depreciable cost over its useful life. Methods include straight-line and reducing balance, chosen to reflect the pattern of benefits consumed.

The total depreciation charged against an asset since acquisition. It is a contra-asset account deducted from cost to arrive at the asset's carrying amount.

A liability of uncertain timing or amount, recognised when a present obligation exists, an outflow is probable, and the amount can be reliably estimated. Warranty and legal claims are common examples.

A possible obligation arising from past events whose existence depends on uncertain future outcomes. It is disclosed rather than recognised unless an outflow becomes probable and measurable.

An amount paid in advance for goods or services not yet received. It is recorded as an asset and later expensed as the benefit is consumed.

Cash received before the related performance obligation is satisfied. It is carried as a liability and released to income as goods or services are delivered.

Sales revenue minus variable costs. It measures how much each sale contributes toward covering fixed costs and then generating profit.

The sales volume or revenue at which total contribution equals total fixed costs, producing neither profit nor loss. It can be expressed in units or dollars.

The excess of budgeted or actual sales over break-even sales, expressed in units, dollars, or percentage. It indicates how far sales can fall before losses arise.

Decision analysis using only future costs and revenues that differ between alternatives. Sunk costs and allocated fixed overheads are excluded because they do not change with the decision.

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

A cost already incurred that cannot be recovered or altered by any future decision. It is excluded from relevant costing because it does not differ between alternatives.

A system that sets predetermined costs for materials, labour, and overhead, then compares them with actual results. Differences are analysed as variances to explain performance.

The process of breaking the gap between budgeted and actual results into price and quantity components. It identifies which factors caused performance to differ from plan.

A budget adjusted to the actual level of activity achieved. It allows fair comparison with actual costs by removing volume effects from performance assessment.

The sum of a project's future cash flows discounted to today at a required rate, minus the initial outlay. A positive result suggests the project adds value.

The discount rate at which a project's net present value equals zero. It is compared with the required hurdle rate to decide whether to accept an investment.

The rate used to convert future cash flows into present value, reflecting the time value of money and the risk of the cash flows.

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 hurdle rate for investments.

The mix of debt and equity a company uses to finance its assets. The choice affects financial risk, interest obligations, and the overall cost of capital.

A measure of how much debt a company carries relative to equity or total capital. High gearing increases fixed interest obligations and magnifies returns and losses to shareholders.

Current assets minus current liabilities, representing funds tied up in day-to-day operations. Managing it balances liquidity needs against the cost of holding inventory and receivables.

Current assets divided by current liabilities. It indicates whether short-term resources are sufficient to settle obligations falling due within a year.

Cash, marketable securities, and receivables divided by current liabilities. It excludes inventory to test short-term liquidity more strictly than the current ratio.

An internal control that separates authorising, recording, and custody functions so no single person controls a transaction end to end. It reduces the risk of error and fraud going undetected.

The policies and procedures designed to safeguard assets, ensure reliable reporting, and support compliance with laws. It rests on the control environment, risk assessment, control activities, information, and monitoring.

The risk that the auditor expresses an inappropriate opinion on financial statements that are materially misstated. It combines inherent risk, control risk, and detection risk.

The threshold at which omissions or misstatements could influence the economic decisions of users. It guides the nature, timing, and extent of audit procedures.

Procedures that detect material misstatements, including tests of detail and analytical review. Auditors rely on them more heavily when controls are weak or not tested.

The auditor's formal conclusion on whether financial statements are prepared fairly in all material respects. It may be unmodified, qualified, adverse, or a disclaimer.

The amount on which income tax is calculated, being assessable income less allowable deductions, adjusted for tax-specific rules that differ from accounting profit.

The amount attributed to an asset or liability for tax purposes. Differences between tax base and carrying amount give rise to temporary differences and deferred tax balances.

A balance reflecting tax payable or recoverable in future periods due to temporary differences between accounting carrying amounts and tax bases. It is recognised as an asset or liability.

A legal obligation to act in another party's best interests, avoiding conflicts and personal gain. Company directors owe this duty to the company they govern.

A situation where a person's private interests could improperly influence their professional judgement. It must be disclosed and managed, often by removing the person from the decision.

The state of being free from relationships or interests that could compromise objectivity. Auditors must be independent in fact and appearance to lend credibility to their opinions.