CIMA F1 key terms

A set of principles that guides how financial statements are prepared, covering the objective of reporting, qualitative characteristics of useful information, and definitions of assets, liabilities, income and expenses.

Recording income when it is earned and expenses when they are incurred, regardless of when cash changes hands. It matches costs with the benefits they generate in the same period.

The assumption that an entity will continue operating for the foreseeable future, so assets are not valued at break-up amounts and liabilities are not accelerated.

Information that is complete, neutral and free from material error, so it depicts the economic substance of transactions rather than merely their legal form.

A qualitative characteristic that lets users identify similarities and differences between entities or periods, normally achieved by applying consistent accounting policies and disclosing any changes.

The threshold at which an omission or misstatement could influence decisions of users. It depends on size and nature, and material items must be presented or disclosed separately.

Accounting for the economic reality of a transaction rather than its legal arrangement, such as recognising leased assets or factoring with recourse on the balance sheet.

The specific principles, bases, conventions, rules and practices an entity applies in preparing and presenting financial statements, disclosed and applied consistently.

Supplementary information in the notes that explains figures in the primary statements, accounting policies, judgements and risks, enabling users to understand the numbers presented.

A statement classifying cash movements into operating, investing and financing activities, reconciling opening and closing cash and explaining liquidity and solvency.

Cash flows from the entity's main revenue-producing activities, presented under the indirect method by adjusting profit for non-cash items and working capital movements.

The body of company law, accounting standards and stock exchange rules that governs how entities prepare, audit, publish and file financial statements in a jurisdiction.

International Financial Reporting Standards, a set of principles-based standards issued by the IASB and adopted by many jurisdictions to harmonise financial reporting worldwide.

The system of rules, practices and processes by which a company is directed and controlled, balancing the interests of shareholders, management, creditors and other stakeholders.

A conflict of interest arising because directors and managers act as agents for shareholders and may pursue their own goals, which governance mechanisms such as independent boards seek to control.

A committee of independent non-executive directors responsible for overseeing financial reporting, internal controls and the relationship with external auditors, strengthening governance.

An independent examination of financial statements by a qualified auditor who expresses an opinion on whether they are prepared fairly in accordance with the applicable framework.

The overriding requirement that financial statements present fairly the financial position and performance of the entity, even where a specific rule might otherwise mislead.

The principles of integrity, objectivity, professional competence, confidentiality and professional behaviour that accountants must follow, including independence from clients.

The process of concealing the criminal origin of funds through placement, layering and integration, which accountants must help prevent through customer due diligence and suspicious activity reporting.

Tangible non-current assets held for use in production or administration and expected to be used for more than one period, initially measured at cost and subsequently depreciated.

The systematic allocation of the depreciable amount of a non-current asset over its useful life, reflecting consumption of economic benefits rather than changes in market value.

A depreciation method charging an equal amount each year, calculated as cost less residual value divided by useful life, suited to assets used evenly over time.

A depreciation method applying a constant percentage to the asset's carrying amount, giving higher charges in early years and matching the pattern of benefits for some assets.

The estimated amount an entity would currently obtain from disposing of an asset at the end of its useful life, after deducting expected disposal costs.

The amount at which an asset is recognised in the statement of financial position, being cost or revalued amount less accumulated depreciation and accumulated impairment losses.

A subsequent measurement basis under which non-current assets are carried at fair value at the revaluation date less subsequent depreciation, with increases taken to other comprehensive income.

A reduction in the recoverable amount of an asset below its carrying amount, recognised as an expense in profit or loss unless it reverses a previous revaluation surplus.

The higher of an asset's fair value less costs of disposal and its value in use, used as the ceiling for the carrying amount in impairment testing.

Assets held for sale in the ordinary course of business, in the process of production, or in the form of materials to be consumed, measured at the lower of cost and net realisable value.

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

A cost formula assuming the earliest inventory purchased is sold first, so closing inventory reflects the most recent purchase prices and tends to be higher during rising prices.

An inventory cost formula recalculating an average unit cost after each purchase, smoothing price movements and lying between FIFO and earlier-purchase valuations.

A list of ledger balances at a date, used to check that total debits equal total credits before adjustments are made for accruals, prepayments, depreciation and closing inventory.

An expense incurred in the period but not yet invoiced or paid, recorded as a liability and charged to profit or loss to satisfy the accrual basis.

An amount paid in advance for goods or services to be received in a later period, carried as an asset until the benefit is consumed.

The excess of current assets over current liabilities, indicating short-term liquidity and the funds tied up in inventory and receivables less payables.

A statement showing assets, liabilities and equity at a reporting date, demonstrating that recognised assets equal liabilities plus equity.