CIMA BA1 key terms

The value of the next best alternative given up when a choice is made. It includes both explicit money spent and the income or benefit forgone, and it underpins decisions about scarce resources.

The condition in which resources such as labour, land and capital are limited while human wants are unlimited. It forces individuals, firms and governments to choose between competing uses.

The quantity of a good or service that buyers are willing and able to purchase at each price over a given period. Normally, quantity demanded falls as price rises, other things being equal.

The quantity of a good or service that producers are willing and able to offer for sale at each price over a period. Normally, quantity supplied rises as price rises, other things being equal.

The market price at which the quantity demanded equals the quantity supplied, so there is no shortage or surplus. Changes in demand or supply move the equilibrium price and quantity.

A measure of how strongly quantity demanded responds to a change in price, calculated as percentage change in quantity divided by percentage change in price. Demand is elastic when the value exceeds one in absolute terms.

The extra cost of producing one additional unit of output. It is used with marginal revenue to decide whether expanding or contracting output raises profit.

Reductions in average cost per unit that arise as output grows, for example through bulk buying, specialisation or better use of machinery. They are a reason large firms may compete more effectively than small ones.

The total market value of final goods and services produced within a country's borders in a period. It is a headline measure of economic activity and is used to compare growth between countries and over time.

A sustained rise in the general level of prices, reducing the purchasing power of money. It affects interest rates, wage demands, inventory values and the real value of reported profits.

The price of borrowing money, usually expressed as a percentage per year. Central banks use it to influence spending and inflation, and firms use it to discount future cash flows.

The recurring pattern of expansion and contraction in economic activity over time, moving through boom, downturn, recession and recovery. It affects demand, employment, cash flow and investment decisions.

A cost that does not change in total when the volume of activity changes within a relevant range, such as rent or salaried supervision. Fixed cost per unit falls as output rises.

A cost that changes in total in direct proportion to the volume of activity, such as raw materials or piece-rate labour. Variable cost per unit is normally constant within the relevant range.

Sales revenue minus variable costs. It measures how much each sale adds towards covering fixed costs and then generating profit, and it is central to break-even and decision-making calculations.

The level of activity at which total revenue equals total cost, so profit is zero. It can be expressed in units, as fixed costs divided by contribution per unit, or in revenue terms.

The amount by which budgeted or actual sales exceed the break-even level, shown in units, revenue or as a percentage. It indicates how far sales can fall before a loss is made.

A costing method that assigns both variable and fixed production overheads to units produced. It is required for external financial reporting in many jurisdictions but can distort short-term decisions.

A costing method that charges only variable production costs to units, treating fixed production overheads as a period cost. It supports contribution-based decisions such as pricing and accepting special orders.

The rate used to spread production overhead across units, calculated as budgeted overhead divided by budgeted activity such as labour hours or machine hours. It converts indirect costs into a per-unit charge.

A planned unit cost built from expected quantities and prices for materials, labour and overhead. Comparing standard with actual cost produces variances that highlight where performance differed from plan.

The process of comparing actual results with budgeted or standard figures and explaining the differences. Variances are classed as favourable or adverse and are investigated to improve future control.

A quantified plan for a future period, expressed in money, units or hours. Budgets coordinate activities, allocate resources, communicate targets and provide a benchmark for controlling actual performance.

A future, incremental cash flow that differs between alternatives and therefore matters for a decision. Past costs and costs common to all options are irrelevant and should be excluded.

Money already spent that cannot be recovered by any future decision. It is irrelevant to decision-making because it is the same whichever option is chosen.

The principle that revenue and expenses are recognised when earned or incurred, not when cash changes hands. It matches costs with the income they helped generate in the same period.

The assumption that an entity will continue operating for the foreseeable future, with no intention or need to liquidate. It justifies carrying assets at cost rather than break-up value.

A principle requiring caution when making estimates under uncertainty, so liabilities and losses are not understated and assets and gains are not overstated. It does not permit deliberate understatement of profit.

A system in which every transaction is recorded with equal debits and credits, so total debits always equal total credits. It provides built-in checks and supports preparation of the financial statements.

A list of all ledger account balances at a date, split into debit and credit columns. If the totals agree, arithmetic accuracy is indicated, though errors of principle or omission may remain.

The book of prime entry used to record transactions that do not fit the sales, purchases or cash books, such as adjustments and corrections. Each entry shows debits, credits and a narrative.

The systematic allocation of the cost of a non-current asset over its useful life. It spreads the expense across the periods benefiting from the asset and reduces the carrying amount in the statement of financial position.

A report classifying cash movements into operating, investing and financing activities over a period. It explains the change in cash and helps users assess liquidity and the quality of reported profit.

Current assets minus current liabilities, representing the funds tied up in day-to-day operations. Positive working capital supports liquidity, while poor management can cause cash shortages despite profit.

Current assets divided by current liabilities. It indicates whether short-term assets are sufficient to settle short-term obligations, though acceptable levels vary by industry.

A measure of the proportion of a company's capital financed by debt rather than equity. High gearing increases financial risk because interest and repayment obligations must be met whatever profit is earned.

The principle that money available now is worth more than the same amount later because it can be invested to earn a return. It underlies discounting, net present value and investment appraisal.

A conflict of interest that arises when managers (agents) act for owners (principals) and may pursue their own goals rather than maximise shareholder value. Governance mechanisms such as independent boards aim to reduce it.

The system of rules, practices and processes by which a company is directed and controlled. It covers board responsibilities, accountability to shareholders and protection of other stakeholders' interests.

A committee of independent non-executive directors responsible for overseeing financial reporting, external audit and internal control. It strengthens the reliability of reported information and supports board independence.

The duty of directors and managers to protect and manage assets and resources entrusted to them honestly and in the interest of the entity. It supports accountability and long-term value creation.

A clear statement of terms on which one party is prepared to be bound by contract, communicated to another. It becomes a binding agreement only when the other party accepts it.

Unqualified agreement to all the terms of an offer, communicated to the offeror. A counter-offer or conditional response normally destroys the original offer rather than accepting it.

Something of value given by each party in exchange for the other's promise, such as money for goods. Without consideration, a promise is generally not enforceable as a simple contract.

An agreement, express or implied, under which an employee works for an employer in return for pay and other terms. It creates mutual duties and statutory rights distinct from a self-employed arrangement.

A breach of the employment contract by the employer, typically dismissal without the notice or procedure agreed. It differs from unfair dismissal, which concerns whether the reason and process were fair.

A legal obligation to act in another party's best interests, avoiding conflicts of interest and personal gain from the position. Directors owe fiduciary duties to the company they serve.