CMA Final Paper 16 flashcards

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

Revenue recognition five steps

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

Variable consideration constraint

Estimated variable consideration is included in the transaction price only to the extent a significant revenue reversal is not probable when uncertainty resolves.

Finance lease criteria

A lease is a finance lease if ownership transfers, a bargain purchase option exists, the term is a major part of asset life, present value of payments is substantially all fair value, or the asset is specialized.

Goodwill impairment reversal

Goodwill is tested at least annually and never amortized. Under IFRS an impairment loss on goodwill cannot be reversed; US GAAP also prohibits reversal.

Foreign currency translation method

When the functional currency is the foreign currency, translate assets and liabilities at the closing rate, income items at the average rate, with the adjustment to other comprehensive income.

Fair value hierarchy levels

Level 1 uses quoted prices for identical assets in active markets; Level 2 uses other observable inputs; Level 3 uses unobservable inputs supported by the best available information.

Deferred tax valuation allowance

A valuation allowance reduces a deferred tax asset when it is more likely than not, meaning greater than 50%, that some or all of the benefit will not be realized.

Variance decomposition identity

Static budget variance equals the flexible budget variance plus the sales volume variance; the flexible variance isolates price and efficiency, and the volume variance isolates activity.

Breakeven units formula

Breakeven units equal fixed costs divided by contribution margin per unit, where contribution margin per unit is selling price minus variable cost per unit.

Degree of operating leverage

Operating leverage equals contribution margin divided by operating income; it states the percentage change in operating income for each one percent change in sales.

Residual income formula

Residual income equals operating income minus the required rate of return multiplied by invested capital; it discourages the underinvestment incentive created by ROI.

Balanced scorecard perspectives

The four perspectives are financial, customer, internal business process, and learning and growth, linked by cause-and-effect relationships in a strategy map.

Zero-based budgeting

Each budget is built from zero rather than from the prior year, forcing managers to justify every cost; it consumes more time but challenges embedded spending.

Net present value decision rule

Discount incremental after-tax cash flows at the cost of capital; accept projects with positive NPV and, among mutually exclusive projects, choose the highest positive NPV.

IRR limitations

Internal rate of return sets NPV to zero and assumes reinvestment at the IRR; it can give multiple answers for nonconventional cash flows and misranks projects by scale.

Profitability index use

Profitability index equals present value of inflows divided by initial investment; under capital rationing with divisible projects, rank projects by highest index.

Relevant cash flow criteria

Cash flows must be incremental, after-tax, and future; exclude sunk costs and allocated fixed costs, include opportunity costs, and ignore financing costs captured in the discount rate.

Weighted average cost of capital

WACC equals the weighted sum of after-tax cost of debt, cost of preferred stock, and cost of equity, with after-tax debt equal to the pre-tax rate times one minus the tax rate.

Cash conversion cycle

The cycle equals days inventory outstanding plus days sales outstanding minus days payable outstanding; a shorter cycle reduces the cash tied up in operations.

Porter's five forces

Industry attractiveness depends on new entrants, buyer power, supplier power, substitute threats, and rivalry; stronger combined forces compress sustainable industry profitability.

Porter's generic strategies

Firms compete through cost leadership, differentiation, or focus on a narrow segment; failing to choose a clear strategy leaves a firm stuck in the middle.

BCG matrix categories

Business units are stars, cash cows, question marks, or dogs based on market growth and relative market share, guiding investment and divestment decisions.

IMA ethical principles

The IMA Statement of Ethical Professional Practice lists honesty, fairness, objectivity, and responsibility as principles, supported by standards of competence, confidentiality, integrity, and credibility.

Ethical conflict escalation

Follow organizational policy, escalate to the immediate supervisor unless involved, then to higher management, and consider a confidential ethics hotline or legal counsel.

Equivalent units of production

Equivalent units equal units completed plus ending work in process multiplied by its percentage of completion, used to compute cost per equivalent unit.

Activity-based costing drivers

ABC assigns overhead using activity cost pools and cost drivers such as setups, machine hours, and orders, improving accuracy when products consume overhead differently.

Predetermined overhead rate

The rate equals estimated total overhead divided by the estimated activity base; applied overhead equals the rate multiplied by actual activity, with the difference disposed of at period end.

Material price variance

Material price variance equals actual price minus standard price, multiplied by actual quantity purchased; it is often isolated at the point of purchase.

Labor efficiency variance

Labor efficiency variance equals actual hours minus standard hours allowed, multiplied by the standard rate, measuring the productivity of labor used.

Learning curve effect

Each time cumulative output doubles, cumulative average time per unit falls by a constant percentage; a 90% curve means the second unit takes 90% of the first unit's time.

COSO control components

The five components are control environment, risk assessment, control activities, information and communication, and monitoring activities, supported by seventeen underlying principles.

Segregation of duties

Custody of assets, authorization of transactions, and record keeping are separated so no single person can both perpetrate and conceal an error or fraud.

Fraud triangle elements

Fraud requires pressure or incentive, opportunity, and rationalization; internal controls primarily reduce opportunity, while culture and monitoring address the other elements.

Audit risk model

Audit risk equals inherent risk multiplied by control risk multiplied by detection risk; the auditor controls detection risk through the nature, timing, and extent of testing.

Recovery time and point objectives

Recovery time objective is the maximum tolerable downtime; recovery point objective is the maximum tolerable data loss, both set through a business impact analysis.