CMA Final Paper 20A flashcards

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

Relevant cost

A future cash flow that differs between alternatives. Sunk costs, committed costs, and allocated fixed overheads are excluded because they do not change with the decision.

Break-even units formula

Fixed costs divided by contribution per unit, where contribution per unit equals selling price minus variable cost per unit. It gives the volume at which total contribution equals fixed costs.

Contribution per scarce resource

Contribution per unit divided by the units of the limiting resource each product consumes. When capacity is constrained, products are ranked by this figure rather than by unit contribution.

Opportunity cost in decisions

The contribution forgone from the next best alternative use of a resource. It becomes a relevant cost when accepting an order uses capacity that could otherwise generate contribution.

Activity-based costing

An overhead absorption method that assigns costs to activities and then to products using cost drivers such as set-ups or orders. It improves product cost accuracy where overheads are not volume-driven.

COSO control components

The five components of internal control: control environment, risk assessment, control activities, information and communication, and monitoring activities. They apply to all entities regardless of size.

Segregation of duties

Separating custody of assets, authorisation of transactions, and record-keeping so no single person controls all three. It reduces the risk of error and fraud going undetected.

Residual risk

The risk remaining after management has applied controls and risk responses. It is compared with the entity's risk appetite to decide whether further action is needed.

Audit risk model

Audit risk equals inherent risk multiplied by control risk multiplied by detection risk. Detection risk is the only element the auditor manages through the nature, timing, and extent of testing.

Three lines model

Management owns and manages risk in the first line, risk and compliance monitor in the second, and internal audit gives independent assurance in the third.

Quick ratio

Current assets excluding inventory and prepayments, divided by current liabilities. It tests short-term liquidity using assets that can be converted to cash quickly.

DuPont decomposition

Return on equity equals net profit margin multiplied by asset turnover multiplied by the equity multiplier. It shows whether returns come from profitability, efficiency, or leverage.

Cash conversion cycle

Days inventory outstanding plus days receivables outstanding minus days payables outstanding. It measures how long cash is tied up in operating working capital.

IFRS 15 revenue recognition

Revenue is recognised when control of the promised goods or services transfers to the customer, measured at the consideration the entity expects to be entitled to.

IFRS 16 lessee accounting

A lessee recognises a right-of-use asset and a lease liability at the present value of lease payments, removing the previous operating and finance lease distinction for lessees.

Impairment test IAS 36

Carrying amount is compared with the higher of fair value less costs of disposal and value in use. Any excess of carrying amount is written off as an impairment loss.

Net present value rule

Discount a project's future cash flows at the cost of capital and subtract the initial investment. Accept independent projects with positive NPV; choose the highest NPV among mutually exclusive options.

Weighted average cost of capital

The weighted average of after-tax cost of debt and cost of equity, weighted by market values of debt and equity. It is the discount rate for projects of average business risk.

CAPM cost of equity

Cost of equity equals the risk-free rate plus beta multiplied by the market risk premium. Beta captures only systematic risk, since unsystematic risk is diversifiable.

Profitability index

Present value of cash inflows divided by the initial investment. Under capital rationing with divisible projects, rank projects by this index to maximise total NPV.

IRR limitations

The discount rate making NPV zero. It can give multiple answers with non-conventional cash flows and can rank projects differently from NPV when scale or timing differs.

Deferred tax

A tax balance arising from temporary differences between an asset or liability's carrying amount and its tax base. Liabilities are recognised in full; assets only when recovery is probable.

Value added tax mechanism

Tax charged on sales (output tax) less tax on purchases (input tax), remitted to the tax authority. It is excluded from revenue and from the measurement of receivables.

Capital allowances

Tax deductions for capital expenditure that replace accounting depreciation in computing taxable income. The tax benefit equals the allowance multiplied by the applicable tax rate.

Arm's length principle

Related-party transactions must be priced as if between independent parties. Transfer pricing methods include comparable uncontrolled price, resale price, cost plus, net margin, and profit split.

Tax evasion versus avoidance

Avoidance uses the tax law legally to reduce tax. Evasion involves concealment, false reporting, or non-disclosure and is a criminal offence.

Fraud triangle

Fraud is explained by pressure or incentive, opportunity, and rationalisation. Controls mainly reduce opportunity, while ethical culture addresses rationalisation.

Conflict of interest

A situation where a personal interest could improperly influence professional judgement. The standard response is disclosure and, where necessary, withdrawal from the decision.

Whistleblowing justification

Disclosure of wrongdoing is justified when the matter is serious, internal channels have failed or are unsafe, and the disclosure is proportionate and supported by evidence.

Agency problem

Managers acting as agents may pursue their own interests rather than those of shareholders. Incentives, monitoring, and disclosure are used to align the two.

Audit committee role

A board committee of independent directors that oversees financial reporting, internal control, internal audit, and the appointment and independence of the external auditor.

Integrated reporting capitals

The six capitals are financial, manufactured, intellectual, human, social and relationship, and natural. Integrated reporting connects them to strategy, governance, performance, and prospects.

Double materiality

Financial materiality covers sustainability matters affecting enterprise value; impact materiality covers the entity's effects on environment and society. Reporting may require both perspectives.