FY13CE Accounting flashcards

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

Accounting equation

Assets = Liabilities + Equity. Every transaction preserves this balance, so total debits always equal total credits in the double-entry system.

Revenue recognition five steps

Identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when each obligation is satisfied.

LIFO vs FIFO

LIFO assigns the newest costs to cost of goods sold, producing higher COGS and lower taxable income during inflation. FIFO assigns the oldest costs to COGS.

Double-declining balance depreciation

An accelerated method computing depreciation as twice the straight-line rate multiplied by beginning book value, ignoring salvage value until the final year.

Goodwill impairment test

Goodwill is not amortized. It is tested at least annually; if carrying amount exceeds fair value, an impairment loss is recognized for the excess.

Contribution margin

Sales minus variable costs. It measures the amount available to cover fixed costs and then generate profit; the ratio equals contribution margin divided by sales.

Break-even point

The sales volume at which total revenue equals total cost and profit is zero. In units it equals fixed costs divided by unit contribution margin.

Margin of safety

Actual or budgeted sales minus break-even sales. It indicates how much sales can decline before the company incurs a loss.

Operating leverage

Contribution margin divided by net operating income. Higher values mean a given percentage change in sales produces a larger percentage change in profit.

Overapplied overhead

Occurs when overhead applied to jobs using the predetermined rate exceeds actual overhead incurred. The difference is closed to cost of goods sold or prorated.

Absorption vs variable costing

Absorption costing assigns fixed manufacturing overhead to products; variable costing expenses it as a period cost. Income differs by inventory change times the fixed overhead rate.

Sunk cost

A cost already incurred that cannot be recovered and does not differ among alternatives. It is irrelevant to decision making and must be excluded.

Audit risk model

Audit risk equals inherent risk times control risk times detection risk. The auditor controls detection risk through the nature, timing, and extent of substantive procedures.

Sufficiency vs appropriateness

Sufficiency is the quantity of audit evidence; appropriateness is its relevance and reliability. External original documents are more reliable than internal copies.

Qualified opinion

Issued when a material but not pervasive departure from GAAP exists, or when the auditor cannot obtain sufficient appropriate evidence, with a basis paragraph describing the issue.

Management representation letter

A written letter from management confirming representations made during the audit, dated as of the audit report date and covering all periods presented.

Going concern

The assumption that an entity will continue operating. If substantial doubt exists, the auditor adds an emphasis-of-matter paragraph; if the doubt is alleviated, disclosure may suffice.

Materiality

The magnitude of an omission or misstatement that would influence a reasonable user's economic decisions. Performance materiality is set below overall materiality.

Accounts receivable confirmation

A direct written response from a customer verifying a balance. The auditor presumes confirmation is necessary unless balances are immaterial or the procedure would be ineffective.

Statute of Frauds

Requires a writing for contracts involving land, promises to pay another's debt, marriage consideration, terms exceeding one year, and goods of $500 or more.

Contract elements

Offer, acceptance, consideration, capacity, and legality. A counteroffer terminates the original offer and creates a new one requiring acceptance.

AICPA independence

Independence in fact and appearance is required for attest services. It prohibits financial interests, certain loans, and employment relationships with the client.

Circular 230

IRS rules governing practice before the agency. It bars written tax advice based on unreasonable positions and sets best-practices and due-diligence standards.

Negligence elements

Duty of care, breach of that duty, actual and proximate causation, and resulting damages. Comparative negligence reduces recovery in proportion to plaintiff fault.

Apparent authority

Authority a principal creates by conduct that leads a third party to reasonably believe an agent is authorized, even without actual authority.

Capital loss limitation

Net capital losses offset capital gains; up to $3,000 per year ($1,500 married filing separately) may offset ordinary income, and the remainder carries forward.

MACRS half-year convention

Depreciation method treating all property placed in service during a year as placed mid-year, regardless of the actual acquisition date.

Standard deduction

A fixed deduction amount based on filing status that reduces taxable income. Itemized deductions are claimed only when they exceed it.

Section 179 expensing

Allows immediate deduction of qualifying tangible property up to an annual limit, phased out when total purchases exceed the threshold.

COSO internal control

Five components: control environment, risk assessment, control activities, information and communication, and monitoring. Together they provide reasonable assurance of objectives.

Segregation of duties

Separating custody of assets, authorization, and recordkeeping so no single person controls a transaction end to end, reducing fraud and error risk.

Batch vs online processing

Batch processing accumulates transactions and processes them periodically; online real-time processing updates records immediately as each transaction occurs.