CTA Finance & Accounting key terms

A method of accounting where revenues are recognized when earned and expenses when incurred, regardless of when cash is received or paid. It provides a more accurate picture of a company's financial position than the cash basis.

The accounting rule that revenue is recorded when the performance obligation is satisfied, that is, when goods or services are transferred to the customer, not necessarily when payment is received.

The concept that expenses should be recognized in the same period as the revenues they help generate. This often requires adjusting entries to align costs with related income.

Payments made in advance for goods or services to be consumed in future periods. They are initially recorded as assets and then expensed over time as the benefit is used.

A liability representing cash received from a customer before the related goods or services are provided. It is later recognized as revenue when the obligation is fulfilled.

Expenses that have been incurred but not yet paid or recorded. They are recognized at the end of an accounting period through adjusting entries to match expenses with revenues.

The systematic allocation of the cost of a tangible asset over its useful life. It reflects the consumption of the asset's economic benefits and is an expense in the income statement.

The gradual reduction of an intangible asset's cost over its useful life, similar to depreciation for tangible assets. It is also used for the periodic repayment of loan principal.

A permanent reduction in the value of an asset when its carrying amount exceeds its recoverable amount. It requires writing down the asset and recognizing a loss.

An intangible asset arising from the acquisition of a business, representing the excess of the purchase price over the fair value of identifiable net assets. It is tested annually for impairment.

The process of combining the financial statements of a parent company and its subsidiaries into a single set of statements, eliminating intercompany transactions and balances.

An accounting method used when an investor has significant influence over an investee, typically with a 20-50% ownership stake. The investment is initially recorded at cost and adjusted for the investor's share of profits or losses.

The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. It usually exists when one entity owns more than 50% of another's voting rights.

The power to participate in the financial and operating policy decisions of an investee but not control them. It is often presumed when an investor holds 20% or more of the voting power.

A costing method that assigns all manufacturing costs, both variable and fixed, to products. It is required for external financial reporting under generally accepted accounting principles.

A costing method that includes only variable manufacturing costs in product costs, treating fixed manufacturing overhead as a period expense. It is useful for internal decision-making.

A costing system that assigns overhead costs to products based on the activities that drive those costs, using multiple cost drivers rather than a single volume-based measure.

The process of assigning indirect costs, such as factory rent or supervision, to cost objects like products or departments using a systematic method, often based on a predetermined rate.

A factor that causes or influences the level of costs in an activity. In activity-based costing, it is used as the basis for allocating overhead costs to products.

The amount remaining from sales revenue after variable costs have been deducted. It contributes to covering fixed costs and then to profit, and is key in cost-volume-profit analysis.

The level of sales at which total revenues equal total costs, resulting in zero profit or loss. It can be expressed in units or sales dollars.

The difference between actual or expected sales and break-even sales. It measures how much sales can decline before the company incurs a loss.

A technique used to examine the relationship between changes in costs, volume, and profit. It helps managers make decisions about pricing, product mix, and capacity.

The difference between the present value of cash inflows and outflows of a project. A positive NPV indicates that the project is expected to add value to the firm.

The discount rate that makes the net present value of a project's cash flows equal to zero. It is used to evaluate the profitability of potential investments.

The length of time required to recover the initial investment in a project from its cash inflows. It is a simple measure of liquidity and risk but ignores the time value of money.

A valuation method that estimates the value of an investment based on its expected future cash flows, discounted to present value using an appropriate discount rate.

The difference between current assets and current liabilities. It measures a company's short-term liquidity and operational efficiency.

A liquidity ratio calculated as current assets divided by current liabilities. It indicates a company's ability to pay its short-term obligations.

A stringent liquidity measure that subtracts inventory from current assets before dividing by current liabilities. It focuses on the most liquid assets.

The time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It is calculated as days inventory outstanding plus days sales outstanding minus days payables outstanding.

The ability of a company to meet its short-term obligations as they come due. It is assessed using ratios such as the current ratio and quick ratio.

The use of legal methods to minimize tax liability, such as taking advantage of deductions and credits. It is distinct from tax evasion, which is illegal.

The illegal non-payment or underpayment of taxes through deliberate concealment or misrepresentation of income or expenses. It is subject to criminal penalties.

A tax liability or asset recorded on the balance sheet due to temporary differences between accounting profit and taxable profit. It arises from timing differences in recognizing income and expenses.

The pricing of goods, services, and intangibles transferred between related parties, such as subsidiaries of the same parent company. It must comply with arm's length principles for tax purposes.

The policies and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.

A widely used model for designing and evaluating internal controls, consisting of five components: control environment, risk assessment, control activities, information and communication, and monitoring.

An internal control principle that divides responsibilities among different people to reduce the risk of error or fraud, ensuring that no single individual has control over all aspects of a transaction.

The process of identifying, analyzing, and evaluating risks that could affect the achievement of an organization's objectives. It is a key component of the COSO internal control framework.

A situation where an individual's personal interests could improperly influence their professional judgment or actions. It must be disclosed and managed to maintain ethical standards.

The ethical principle that requires professionals to refrain from disclosing confidential information acquired through their work without proper authority, unless legally or professionally obligated to do so.

An attitude of questioning and critical assessment of evidence, maintaining a questioning mind and being alert to conditions that may indicate possible misstatement due to error or fraud.

The ethical requirement that auditors and other professionals remain free from relationships or interests that could compromise their objectivity and impartiality in performing their duties.