CMA Final Paper 16 key terms

The process of reporting income when a performance obligation is satisfied: identify the contract, identify distinct obligations, set the transaction price, allocate that price to obligations, and recognize revenue as each obligation is fulfilled.

A promise in a customer contract to transfer a distinct good or service. Each obligation is accounted for separately, and revenue is recognized when control of that good or service passes to the customer.

A contract asset arises when a firm has performed but its right to payment depends on future conditions; a contract liability is cash received before performance. They differ from ordinary receivables, which are unconditional rights to payment.

Recording revenue when earned and expenses when incurred, regardless of when cash moves. It matches effort with accomplishment and produces receivables, payables, and deferrals that cash accounting does not show.

Cash collected from a customer before the related good or service is delivered. It is reported as a liability until the performance obligation is satisfied, at which point it converts into recognized revenue.

Under current standards, most leases lasting more than twelve months put a right-of-use asset and a lease liability on the lessee's balance sheet, with expense split between interest and amortization for finance-type leases.

Combining a parent and its controlled subsidiaries into one set of statements. The portion of a subsidiary's net assets and profit not owned by the parent is shown separately as noncontrolling interest within equity.

The excess of purchase consideration plus fair value of noncontrolling interest over the fair value of identifiable net assets acquired. It is not amortized but tested at least annually for impairment.

A write-down when an asset's carrying amount exceeds its recoverable amount. It reduces reported profit and asset value, and reversal rules differ between asset classes and reporting frameworks.

An exit price representing what 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.

Sorting financial assets by how they are measured: amortized cost when held to collect contractual cash flows, fair value through other comprehensive income, or fair value through profit or loss.

Items of income and expense excluded from profit or loss, such as certain remeasurements and translation differences, accumulated in equity and recycled to profit when specified conditions are met.

A statement classifying cash movements into operating activities, investing activities, and financing activities, reconciling opening to closing cash and revealing liquidity and quality of earnings.

Disclosure of revenue, profit, assets, and liabilities for operating segments that meet quantitative thresholds, giving users a view of the business through the eyes of management.

A coordinated set of operating and financial budgets covering sales, production, purchases, expenses, cash, and pro forma statements for a defined period, used to plan resources and set performance targets.

A budget restated for the actual volume achieved. Comparing actual results with a flexible budget isolates spending variances from volume variances, improving performance evaluation.

A method in which every activity and cost must be justified from a zero base each cycle rather than incrementally from last year's figure, often using decision packages ranked for funding.

A forecast continually updated by adding a new period as the earliest one lapses, so the planning horizon stays constant and estimates reflect the latest information.

Breaking the difference between actual and standard results into price and quantity components to explain causes, assign responsibility, and decide whether standards or operations need correction.

Assigning predetermined costs to materials, labor, and overhead so actual costs can be compared with standards. Variances highlight inefficiency but standards can become outdated.

The price one division charges another for an internal transfer. It affects divisional profit, goal congruence, and tax exposure, and may be market-based, cost-based, or negotiated.

A performance framework linking financial, customer, internal process, and learning and growth measures, translating strategy into objectives, measures, targets, and initiatives.

A small set of measures chosen because they signal progress on critical success factors. Good indicators are specific, measurable, and tied to decisions rather than merely easy to collect.

An organizational unit accountable for specified results: a cost center for costs, a revenue center for sales, a profit center for profit, or an investment center for profit relative to invested capital.

Divisional profit minus a charge for the capital employed, computed as operating income less the required return multiplied by invested capital. It discourages accepting projects that earn below the required rate.

Operating income divided by invested capital, often decomposed into margin and turnover. It is intuitive but can motivate managers to reject profitable projects that dilute the current ratio.

After-tax operating profit minus the cost of capital multiplied by adjusted invested capital. It approximates value created in a period and aligns managerial incentives with shareholder wealth.

A future cost that differs between alternatives. Sunk costs and costs identical under every option are irrelevant, which is central to make-or-buy, special-order, and keep-or-drop decisions.

The benefit forgone by choosing one alternative over the next best one. It is not recorded in accounting ledgers but must be included when evaluating mutually exclusive decisions.

Evaluating long-term investment proposals by estimating incremental cash flows and discounting them, using methods such as net present value, internal rate of return, payback, and profitability index.

The present value of a project's expected cash inflows minus the present value of its outflows, discounted at the required rate. A positive result suggests the project adds value.

The blended after-tax cost of a firm's debt and equity, weighted by their proportions in the capital structure. It is the usual discount rate for average-risk projects.

The return investors require given a firm's mix of debt and equity. More debt raises financial leverage, which can lower the tax-adjusted cost of capital but increases fixed obligations and financial risk.

Using fixed-cost debt financing so that changes in operating profit produce magnified changes in earnings per share and in the risk borne by shareholders.

The degree to which fixed operating costs amplify the effect of sales changes on operating income. High operating leverage raises profit volatility and breakeven volume.

Sales revenue minus variable costs. It measures what each unit or dollar of sales contributes toward fixed costs and profit, and underpins breakeven and target-profit calculations.

Managing cash, receivables, inventory, and payables to balance liquidity against profitability, shortening the cash conversion cycle while preserving adequate buffers.

Cash from operations minus capital expenditure needed to sustain capacity. It represents cash available for debt repayment, dividends, and reinvestment, and is less distorted by accounting choices.

The sensitivity of reported results or cash flows to currency movements, split into transaction exposure on specific commitments, translation exposure on consolidating foreign units, and economic exposure on competitiveness.

Taking an offsetting position, often through forwards, futures, options, or swaps, to reduce the volatility of an identified exposure. Hedging transfers risk at a cost rather than eliminating it.

A financial contract whose value derives from an underlying rate, price, or index, such as a forward, future, option, or swap. Derivatives can hedge exposure or create speculative leverage.

The system of board oversight, internal controls, disclosure, and accountability through which a company is directed and held answerable to shareholders and other stakeholders.

An integrated structure of five components: control environment, risk assessment, control activities, information and communication, and monitoring, designed to provide reasonable assurance over objectives.

Splitting authorization, custody of assets, and recordkeeping among different people so no single individual can both perpetrate and conceal an error or fraud.

The ethical climate set by senior leadership through example, stated values, and enforcement. It shapes whether controls are respected or bypassed throughout the organization.

A model explaining occupational fraud through three conditions: pressure or incentive, opportunity created by weak controls, and rationalization that lets the perpetrator justify the act.

A process of identifying, assessing, and responding to risks across the whole organization, aligning risk appetite with strategy and embedding risk consideration into decision making.

A widely used structure linking governance and culture, strategy and objective setting, performance, review and revision, and information, communication, and reporting for managing enterprise risk.

The amount and type of risk an organization is willing to accept in pursuing its objectives, expressed as broad statements or quantitative limits that guide decisions and control thresholds.

Assigning indirect costs to cost objects using a chosen base such as direct labor hours or machine hours, often with predetermined rates and activity-based drivers to improve accuracy.

Assigning overhead to products or customers according to the activities they consume, using cost drivers. It improves accuracy where product diversity or complexity makes volume-based rates misleading.

Accounting for an investment giving significant influence but not control, recording the share of the investee's profit in the investor's income and adjusting the carrying amount for dividends received.