FY13CE Accounting key terms

A method that records revenue when earned and expenses when incurred, regardless of when cash moves. It matches costs to the periods they helped generate, so reported profit reflects economic activity rather than cash timing.

Cash received from a customer before the related good or service is delivered. It sits as a liability until the obligation is satisfied, at which point it is recognized as revenue, preventing premature income reporting.

The rules governing when and how much revenue a company reports, generally when control of promised goods or services transfers to the customer, measured at the transaction price allocated to each performance obligation.

A distinct promise in a customer contract to transfer a good or service. Each obligation is identified separately and revenue is allocated to it, so bundled sales are recognized as the separate promises are fulfilled.

The guideline that expenses be reported in the same period as the revenues they helped produce. It drives accruals, depreciation, and inventory cost of goods sold, keeping reported profit from being distorted by timing.

The systematic allocation of a long-lived asset's depreciable cost over its useful life. It is a cost-allocation process, not a measure of market value decline, and may be straight-line, declining balance, or units of output.

A write-down applied when an asset's carrying amount exceeds the cash flows or fair value it can recover. The loss is recognized immediately in earnings, reducing the asset to its recoverable amount.

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, ranked by observable versus unobservable inputs.

The excess of purchase consideration over the fair value of identifiable net assets acquired in a business combination. It is not amortized but tested at least annually for impairment.

Combining a parent's and its controlled subsidiaries' financial statements into one set, eliminating intercompany balances and transactions, so the group is presented as a single economic entity to users.

An accounting approach for investments giving significant influence but not control, typically 20 to 50 percent ownership. The investor records its share of investee profit as income and reduces the carrying amount for dividends received.

A statement classifying cash movements into operating, investing, and financing activities over a period. It reconciles beginning and ending cash and reveals liquidity and quality of earnings beyond accrual profit.

Current assets minus current liabilities, measuring short-term liquidity. Positive working capital suggests a company can meet obligations falling due within a year, though too much may signal idle or slow-moving resources.

Current assets divided by current liabilities. It gauges whether short-term resources cover short-term obligations; a figure near or above one is generally comfortable, but acceptable levels vary by industry.

Cash, marketable securities, and receivables divided by current liabilities, excluding inventory. It is a stricter liquidity test than the current ratio because inventory may take time to convert to cash.

Sales revenue minus all variable costs. It shows how much each unit or dollar of sales contributes toward covering fixed costs and then generating profit, and underlies break-even and target-profit calculations.

The sales volume or revenue at which total contribution margin exactly equals fixed costs, producing zero profit. It can be computed in units as fixed costs divided by unit contribution margin.

The excess of budgeted or actual sales over break-even sales, expressed in dollars, units, or percentage. It indicates how far sales can fall before the company incurs a loss.

A future cost that differs between alternatives under consideration. Sunk costs and costs identical across options are excluded, because they cannot change the decision being made.

The benefit forgone by choosing one alternative over the next best option. It is relevant to decisions even when no cash changes hands, such as using a facility for one product instead of another.

A cost already incurred and unrecoverable, such as past research spending or original equipment purchase price. It is irrelevant to future decisions and should not influence whether a project continues.

A system that assigns predetermined costs to materials, labor, and overhead, then compares them with actual results. Variances highlight where operations diverged from plan and direct management attention.

Breaking the difference between budgeted and actual performance into identifiable causes, such as price and quantity components. Favorable or unfavorable labels depend on whether the variance raises or lowers profit.

A budget adjusted to the actual activity level achieved, so costs are compared on a like-for-like volume basis. It isolates spending variances from volume variances that would otherwise distort performance evaluation.

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 widely in complexity or batch size.

A measurable factor that causes or correlates with a cost, such as machine hours, setups, or orders processed. Selecting appropriate drivers is central to accurate overhead assignment and cost behavior analysis.

The risk that the auditor expresses an inappropriate opinion on materially misstated financial statements. It combines inherent risk, control risk, and detection risk, and guides how much evidence is gathered.

The threshold at which omissions or misstatements could influence users' economic decisions. It is a matter of professional judgment and shapes the nature, timing, and extent of audit procedures.

Information used by the auditor to reach conclusions, obtained through inspection, observation, inquiry, confirmation, recalculation, and analytical procedures. Evidence must be sufficient in quantity and appropriate in relevance and reliability.

The processes designed to provide reasonable assurance about reliable reporting, effective operations, and compliance. It comprises the control environment, risk assessment, control activities, information and communication, and monitoring.

Splitting authorization, custody of assets, and recordkeeping among different people so no single person can both commit and conceal an error or fraud. It is a core preventive control in most systems.

Procedures that detect material misstatements at the assertion level, including tests of details and substantive analytical procedures. Auditors rely on them more heavily when controls are weak or not tested.

The amount on which income tax is computed after applying tax rules, which often differ from accounting profit due to timing and permanent differences. Differences create deferred tax assets or liabilities.

A balance arising when taxes paid or carried forward exceed the tax expense recognized in accounting, expected to reduce future taxes. It is recognized only if future taxable profit is probable.

An item that affects taxable income but never accounting income, or the reverse, such as certain fines or tax-exempt income. Unlike temporary differences, it does not reverse and creates no deferred tax.

The conflict that arises when managers acting for owners pursue their own interests, such as perquisites or short-term gains. Governance, incentives, and monitoring are designed to align these interests.

A legal obligation to act in another party's best interest with loyalty and care. Directors, officers, and agents owe it to the entity and its owners, and breaching it can trigger personal liability.

The state of being free from relationships or interests that could compromise objectivity, required of auditors in fact and appearance. It protects the credibility of opinions relied on by investors and the public.

A data processing approach that accumulates transactions and processes them as a group at scheduled intervals. It suits high-volume routine work but delays error detection compared with real-time processing.