FEBNM key terms

Recording revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. It matches effort with accomplishment and underpins the income statement.

The rule that expenses are recognised in the same period as the revenues they helped generate. It drives adjustments such as depreciation, warranty provisions, and cost of goods sold.

A payment made before the benefit is consumed, initially recorded as an asset and later expensed as time passes. Insurance premiums and rent paid in advance are typical examples.

An obligation for goods or services already received but not yet invoiced or paid, such as unpaid wages or interest. It is recorded at period end to keep expenses in the correct period.

The systematic allocation of a tangible asset's depreciable cost over its useful life. It is a cost allocation, not a valuation, and does not represent cash spent in the period.

Depreciation computed as depreciable cost divided by useful life, giving an equal charge each period. It suits assets whose benefits are consumed evenly, such as furniture or buildings.

The amount at which an asset or liability is recognised on the balance sheet, typically cost less accumulated depreciation or impairment. Also called book value.

A reduction in an asset's carrying amount when its recoverable amount falls below book value. The loss is recognised immediately in profit or loss rather than spread over future periods.

A prudence convention that prefers caution when estimating uncertain outcomes, so losses are recognised sooner than gains. It tempers optimism but must not justify deliberate understatement.

Current assets divided by current liabilities, showing whether short-term resources cover short-term obligations. A result below one signals potential liquidity strain, though norms vary by industry.

Cash, marketable securities, and receivables divided by current liabilities, excluding inventory from the numerator. It is a stricter liquidity test for firms holding slow-moving stock.

Sales revenue minus all variable costs, the amount left to cover fixed costs and then generate profit. It is central to break-even analysis and short-run product mix decisions.

The sales volume or revenue at which total contribution equals total fixed costs, so profit is zero. It is computed as fixed costs divided by contribution per unit or contribution margin ratio.

The excess of budgeted or actual sales over break-even sales, expressed in units, currency, or percentage. It measures how far sales can fall before losses begin.

Decision analysis that considers only future costs and revenues that differ between alternatives. Sunk costs and allocated fixed overheads are excluded because they do not change the outcome.

A cost already incurred that cannot be recovered by any future decision. It should be ignored in relevant costing, even though it may still appear in accounting records.

The benefit forgone by choosing one alternative over the next best option. It is rarely recorded in the ledger but is essential to sound resource allocation decisions.

A predetermined rate used to charge indirect production costs to units, often budgeted overhead divided by budgeted labour hours or machine hours. Differences from actual overhead create under- or over-absorption.

An overhead allocation method that assigns costs to activities and then to products based on their consumption of those activities. It improves accuracy where products differ in complexity and batch size.

A predetermined unit cost for materials, labour, and overhead, used as a benchmark for control. Variances between standard and actual costs highlight where performance deviated from plan.

Comparing actual results with budget or standard and decomposing the gap into causes such as price and quantity. Favourable and adverse variances direct management attention to problem areas.

A budget restated for the actual level of activity achieved, so performance can be judged like for like. It isolates spending variances from volume effects when comparing to static plans.

Current assets minus current liabilities, representing the net short-term funds tied up in operations. Managing it balances liquidity against the cost of holding inventory and receivables.

Days inventory outstanding plus days sales outstanding minus days payables outstanding. It shows how long cash is locked in operations before returning from customers.

The sum of a project's future cash flows discounted at the required rate of return, minus the initial outlay. A positive result suggests the investment adds value.

The discount rate at which a project's net present value equals zero. It is compared with the hurdle rate, though it can mislead when comparing projects of different scale.

The weighted average return demanded by a firm's debt and equity providers. It serves as the minimum acceptable return for new investments and as the discount rate in valuation.

The mix of debt and equity used to finance a company's assets. More debt raises financial risk and interest obligations but may lower the average cost of capital up to a point.

The use of borrowed funds to increase the potential return to shareholders. It magnifies both profits and losses and raises the volatility of earnings per share.

The responsiveness of quantity demanded to a change in price, measured as percentage change in quantity over percentage change in price. Demand is elastic when the absolute value exceeds one.

The additional cost of producing one more unit of output. Profit is maximised where marginal cost equals marginal revenue, guiding pricing and output decisions.

The ability to produce a good at a lower opportunity cost than another producer. It explains why specialisation and trade can benefit both parties even when one is absolutely more efficient.

Something of value exchanged between contracting parties, such as money, goods, or a promise. Without consideration, a promise is generally unenforceable as a contract.

The core formation process of a contract: one party proposes terms and the other agrees to them unconditionally. A counter-offer rejects the original offer and starts a new one.

Failure to perform a contractual obligation without lawful excuse. The innocent party may claim damages, specific performance, or terminate depending on the seriousness of the failure.

A legal obligation to act in another party's best interests, owed by directors to the company and by agents to principals. It requires loyalty, good faith, and disclosure of conflicts.

A tax structure in which the average rate rises as the taxable amount increases, so higher earners pay a larger share. Graduated income tax brackets are the classic illustration.

The amount on which tax is levied after allowable deductions and exemptions are subtracted from gross income. It differs from accounting profit because tax rules define income and deductions differently.

A balance sheet item arising from temporary differences between accounting profit and taxable profit, reversing in later periods. It reflects tax that will be paid or recovered in the future.

The threshold at which an omission or misstatement could influence users' economic decisions. It is a matter of professional judgement based on size and nature of the item.

The risk that the auditor expresses an inappropriate opinion on materially misstated financial statements. It combines inherent risk, control risk, and detection risk.

The policies and procedures designed to safeguard assets, ensure reliable reporting, and support compliance with laws. Segregation of duties and authorisation limits are common components.

The system of rules, practices, and processes by which a company is directed and controlled. It allocates rights and responsibilities among shareholders, directors, and management.

Any party affected by or interested in an organisation's activities, including shareholders, employees, customers, suppliers, and communities. Stakeholder analysis shapes strategy and communication priorities.

A structured review of internal strengths and weaknesses alongside external opportunities and threats. It informs strategy formulation but should be paired with deeper competitive analysis.