FEBNM 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 keeps this equality intact, which is why total debits must equal total credits in double-entry bookkeeping.

Accrual Basis

Revenue is recorded when the performance obligation is satisfied and expenses when incurred, regardless of when cash is received or paid.

Straight-Line Depreciation

Annual charge equals cost minus residual value, divided by useful life. It allocates the depreciable base evenly across the asset's expected service period.

Lower of Cost or NRV

Inventory is measured at the lower of cost and net realizable value, where NRV is estimated selling price less costs to complete and sell.

Contribution Margin

Sales revenue minus all variable costs. It measures the amount each sale contributes toward covering fixed costs and then generating operating profit.

Break-Even Point

The activity level where total contribution margin equals fixed costs and profit is zero. In units it equals fixed costs divided by contribution margin per unit.

Margin of Safety

The excess of budgeted or actual sales over break-even sales, divided by budgeted or actual sales. It shows how far sales can fall before losses begin.

Overapplied Overhead

Occurs when overhead applied to production using the predetermined rate exceeds actual overhead incurred. The difference is credited, reducing cost of goods sold.

Net Present Value

The sum of project cash flows discounted at the cost of capital. A positive NPV means the project earns more than the required return.

Weighted Average Cost of Capital

The blended after-tax cost of a firm's debt and equity, weighted by market values. It is the discount rate used for average-risk investment appraisal.

Capital Asset Pricing Model

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

Cash Conversion Cycle

Days inventory outstanding plus days sales outstanding minus days payable outstanding. It measures how long cash is tied up in operating working capital.

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one.

Real Versus Nominal GDP

Nominal GDP uses current prices; real GDP adjusts for inflation using a price index, so changes reflect actual output volume rather than price changes.

Demand-Pull Inflation

Inflation caused by aggregate demand growing faster than the economy's productive capacity, pulling prices upward across markets.

Comparative Advantage

A country benefits from trade by specializing in goods it produces at lower opportunity cost than trading partners, even if it is less efficient absolutely.

Contract Formation Elements

A valid contract requires offer, acceptance, consideration, capacity of the parties, and legality of purpose. A counteroffer rejects and terminates the original offer.

Apparent Authority

Authority an agent appears to possess because of the principal's manifestations to a third party, even without actual authorization. The principal is bound.

Statute of Frauds

A legal rule requiring written evidence for certain contracts, typically involving land, guarantees of another's debt, and goods above a stated value.

Expectation Damages

A breach remedy placing the injured party in the position expected had performance occurred, covering lost profits and costs, limited by foreseeability.

Deferred Tax Liability

A balance-sheet obligation arising from temporary differences where taxable income is currently lower than accounting income and will reverse in future periods.

Marginal Versus Average Tax Rate

The marginal rate applies to the next unit of taxable income; the average rate equals total tax divided by total taxable income.

Permanent Versus Temporary Differences

Permanent differences, such as non-deductible penalties, never reverse. Temporary differences reverse over time and create deferred tax assets or liabilities.

Value Added Tax

A consumption tax collected at each production stage, with businesses crediting tax paid on inputs. The final burden falls on the end consumer.

Audit Risk Model

Audit risk equals inherent risk times control risk times detection risk. The auditor reduces detection risk by changing the nature, timing, and extent of procedures.

Materiality

The threshold of misstatement that could influence economic decisions of users. Performance materiality is set lower for testing individual account balances.

Segregation of Duties

Separating authorization, custody of assets, and record keeping so no single person can both commit and conceal an error or fraud.

Material Weakness

A control deficiency, or combination of deficiencies, giving a reasonable possibility that a material misstatement will not be prevented or detected timely.

Porter's Five Forces

An industry attractiveness framework covering rivalry, new entrants, substitutes, buyer power, and supplier power. Stronger forces compress industry profitability.

Porter's Generic Strategies

Cost leadership, differentiation, and focus. Firms failing to pursue one clearly risk being stuck in the middle with no durable competitive advantage.

BCG Matrix

Classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs to guide portfolio investment decisions.

Agency Theory

A framework where managers as agents may pursue self-interest over shareholders as principals; governance aligns interests through incentives and monitoring.