CTA Finance & Accounting flashcards

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

Fundamental qualitative characteristics

Relevance and faithful representation. Information must be capable of making a difference to decisions and must be complete, neutral and free from material error to be useful.

Performance obligation

A promise in a contract to transfer a distinct good or service to a customer. Revenue is recognised when each obligation is satisfied, either at a point in time or over time.

Right-of-use asset

The lessee's capitalised right to use an underlying asset for the lease term, measured initially at the lease liability plus initial direct costs and prepayments, less lease incentives.

Temporary difference

The gap between the carrying amount of an asset or liability and its tax base. Taxable differences create deferred tax liabilities; deductible differences create deferred tax assets.

Contribution per unit

Selling price minus variable cost per unit. It measures how much each unit sold contributes towards covering fixed costs and then generating profit.

Break-even point

The sales volume at which total contribution equals total fixed costs, giving zero profit. In units it equals fixed costs divided by contribution per unit.

Relevant cost

A future incremental cash flow that differs between alternatives. Sunk costs, committed costs and non-cash items such as depreciation are excluded from the decision.

Overhead absorption rate

Budgeted production overhead divided by budgeted activity level, used to charge overhead into product cost. Comparing absorbed and actual overhead reveals under- or over-absorption.

Throughput accounting ratio

Return per factory hour divided by cost per factory hour for the bottleneck resource. A ratio above one indicates the product earns more than the bottleneck's operating cost.

Weighted average cost of capital

The blended required return of a firm's providers of capital, weighting equity and after-tax debt cost by their market values. It is the standard discount rate for average-risk projects.

Capital asset pricing model

Cost of equity equals the risk-free rate plus beta multiplied by the market risk premium. Beta measures the sensitivity of the share's returns to market movements.

Working capital cycle

Inventory days plus receivable days minus payable days. It shows how long cash is tied up in operations before customers' payments exceed payments to suppliers.

Money market hedge

Hedging foreign currency exposure by borrowing or depositing in the foreign currency now, so a future receipt or payment is fixed at the current spot rate.

Interest rate parity

The principle that the forward exchange rate differs from spot only by the interest rate differential between the two currencies, preventing risk-free arbitrage.

Capital allowance

Tax relief spread over the life of qualifying capital expenditure, replacing accounting depreciation in the tax computation. Disposal can trigger a balancing allowance or charge.

Input tax versus output tax

Output tax is charged on sales; input tax is paid on purchases. A VAT-registered business remits the difference, so VAT is neutral unless input tax is irrecoverable.

Tax avoidance versus evasion

Avoidance uses legal arrangements to reduce tax; evasion involves illegal concealment, false documents or non-disclosure. Only avoidance is legitimate tax planning.

Transfer pricing arm's length principle

Intra-group transactions must be priced as if between independent parties. Tax authorities may adjust profits and impose penalties where documentation does not support the price.

Withholding tax

Tax deducted at source by the payer on cross-border dividends, interest or royalties. Double tax treaties typically reduce the rate and give credit for the tax paid.

Deferred tax asset recognition

Recognised only when it is probable that sufficient future taxable profit will be available to use the deductible temporary difference or unused tax loss.

Audit risk model

Audit risk equals inherent risk times control risk times detection risk. The auditor cannot change inherent or control risk but sets detection risk through the extent of testing.

Performance materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements exceed overall materiality.

Segregation of duties

Separating authorisation, custody, recording and reconciliation so no single person controls a transaction end to end. It limits both error and fraud.

Adverse audit opinion

Issued when misstatements are both material and pervasive to the financial statements. It states that the statements do not give a true and fair view.

Disclaimer of opinion

Issued when the auditor cannot obtain sufficient appropriate evidence and the possible effects are material and pervasive, so no opinion can be expressed.

Control environment

The set of standards, processes and structures forming the foundation of internal control: integrity, ethical values, governance, competence and the tone set by those charged with governance.

Self-review threat

Arises when a firm evaluates its own previous work, such as auditing figures it prepared. Safeguards include using a separate team or declining the non-assurance work.

Independence of appearance

The requirement to avoid circumstances a reasonable, informed third party would perceive as compromising objectivity, even where the auditor's state of mind is unbiased.

Confidentiality principle

Professionals must not disclose client information without authority or legal requirement. The duty survives the end of the engagement and continues indefinitely.

Apparent authority

Where a principal's conduct leads a third party to believe an agent has authority, the principal is bound by the agent's acts even without actual authority.

Negligence elements

A successful claim needs a duty of care, breach of that duty, causation and resulting loss. Professionals are judged against a reasonably competent peer's standard.

Money laundering stages

Placement of criminal proceeds into the financial system, layering to obscure their origin through transactions, then integration into legitimate assets or business activity.