PCPA 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 affects at least two accounts and preserves the balance, with revenues increasing equity and expenses and distributions decreasing it.

Five-Step Revenue Model

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

Net Realizable Value

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Diluted Earnings Per Share

Basic EPS adjusted for all dilutive potential common shares, using the treasury stock method for options and the if-converted method for convertible securities; antidilutive instruments are excluded.

Goodwill Impairment

Under US GAAP, the carrying amount of a reporting unit is compared with fair value; any excess of the goodwill carrying amount over its implied fair value is recognized as a loss.

Deferred Tax Liability

Recognized for taxable temporary differences, typically where the carrying amount of an asset exceeds its tax basis, and reversed as future taxable amounts are reported.

Fair Value Level 3 Inputs

Unobservable inputs reflecting the entity's own assumptions about what market participants would use, applied when relevant observable inputs are unavailable, and requiring sensitivity disclosure.

Audit Risk Model

Audit risk equals inherent risk times control risk times detection risk. Only detection risk is controlled by the auditor, so higher assessed risk requires more effective substantive procedures.

Performance Materiality

An amount set below overall materiality to reduce to an appropriately low probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

Adverse Audit Opinion

An opinion stating that misstatements are both material and pervasive, so the financial statements as a whole do not present fairly the financial position and results.

Disclaimer of Opinion

Issued when the auditor is unable to obtain sufficient appropriate evidence and the possible effects of undetected misstatements are both material and pervasive.

Type 1 Subsequent Event

An event occurring after the reporting date that provides evidence of conditions existing at the reporting date, requiring the financial statements to be adjusted.

COSO Control Environment

The set of standards and processes setting the organization's tone: integrity and ethical values, board oversight, organizational structure, commitment to competence, and assignment of authority and responsibility.

Sampling Risk

The risk that the auditor's conclusion based on a sample differs from the conclusion that would be reached by applying the procedure to the entire population.

Capital Asset Holding Period

A gain or loss is long-term when the capital asset is held more than one year; shorter holdings produce short-term results taxed at ordinary rates.

Inherited Property Basis

The basis of property acquired from a decedent is generally fair market value at the date of death, producing a step-up or step-down in basis.

Statute of Limitations Fraud

No assessment period limit applies where a return is fraudulent or was never filed; otherwise the period is commonly three years, or six if omitted gross income exceeds 25 percent.

Arm's Length Standard

The transfer pricing principle requiring prices between related parties to reflect what independent parties would agree to in comparable transactions and circumstances.

Value Added Tax Mechanism

A consumption tax charged on each sale with a credit for input tax already paid, so the tax burden ultimately falls on the final consumer rather than intermediate businesses.

Permanent Book-Tax Difference

An item recognized for book or tax purposes but never for the other, such as tax-exempt interest or fines; because it never reverses, no deferred tax is recognized.

Gross Domestic Product

The total market value of final goods and services produced within a country's borders in a period, measured as consumption plus investment plus government spending plus net exports.

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price; an absolute value above one indicates elastic demand and below one indicates inelastic demand.

Net Present Value Rule

The sum of future cash flows discounted at the required rate of return minus the initial investment; a positive result means the project adds value.

Weighted Average Cost of Capital

The blended after-tax cost of debt and equity weighted by the proportions of each in the capital structure, used as the discount rate for average-risk projects.

Break-Even Point in Units

The sales volume at which total revenue equals total cost, computed as fixed costs divided by contribution margin per unit, where contribution margin is price minus variable cost.

Money Multiplier

The reciprocal of the reserve requirement ratio, representing the maximum expansion of bank deposits that can result from an initial increase in reserves.

Familiarity Threat

A threat to independence arising when a close or long-standing relationship with a client makes the auditor too sympathetic to the client's interests and too accepting of its work.

Self-Review Threat

A threat arising when the auditor evaluates its own prior work or the output of a service the firm provided, making objective evaluation of that work difficult.

Independence in Appearance

Avoidance of facts and circumstances that a reasonable and informed third party, weighing all relevant facts, would conclude impair the auditor's objectivity and objectivity.

Confidentiality Exception

Disclosure of client information is permitted when required by law, authorized by the client, or made in response to a professional, regulatory, or disciplinary inquiry.

Audit Committee Role

A committee of independent directors responsible for overseeing financial reporting, appointing and compensating the external auditor, and monitoring the internal control environment.

Agency Problem

The conflict in which managers pursuing their own interests may not act in the shareholders' best interest, mitigated by incentive alignment, monitoring, and disclosure.