CMA Foundation Paper 2 (FFCA) flashcards

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

Accounting Equation

Assets equal liabilities plus capital. Every transaction changes at least two elements while keeping the equation balanced, which is why total debits always equal total credits in the ledger.

Dual Aspect Concept

Every transaction has two effects of equal value, one debit and one credit. This principle underlies double entry bookkeeping and makes the trial balance agree when no one-sided errors exist.

Suspense Account

A temporary account opened to absorb the difference in a trial balance when errors cannot be located. It is closed once the one-sided errors causing the imbalance are corrected.

Error of Principle

A bookkeeping error where a transaction is recorded in the wrong class of account, such as capital expenditure posted to repairs. It does not disturb trial balance agreement.

Bank Reconciliation Statement

A statement reconciling the cash book bank balance with the pass book balance, adjusting for unpresented cheques, uncredited deposits, bank charges, interest, and direct collections by the bank.

Consignment Stock Valuation

Unsold consignment stock is valued at proportionate cost plus the consignor's proportionate expenses. The consignee's selling expenses are normally excluded unless the agreement says otherwise.

Consignee Commission

Remuneration paid by the consignor for selling consigned goods. Ordinary commission is a percentage of sales; del credere commission is extra consideration for bearing bad debt risk.

Bills Receivable Discounting

Encashing a bill with a bank before maturity. The drawer receives the amount less discount, and if the acceptor defaults after endorsement, the drawer pays the bank and recovers from the endorser.

Hire Purchase Interest

The finance charge spread over instalments. The buyer records the asset at cash price and treats each instalment as part principal repayment and part interest expense.

Dependent Branch Accounting

A branch that keeps no complete double entry records. The head office records goods sent, cash remittances, and branch expenses in a branch account to compute branch profit.

Sacrificing Ratio

The proportion of profit surrendered by existing partners when a new partner is admitted. It equals each old partner's old ratio minus the new ratio, and goodwill is shared in this ratio.

Gross Profit Formula

Gross profit equals net sales minus cost of goods sold. Cost of goods sold equals opening stock plus purchases plus direct expenses minus closing stock.

Accrual Concept Adjustment

Income earned but not received is added to income and shown as a receivable; expenses incurred but unpaid are added to expenses and shown as a liability in the balance sheet.

Provision for Doubtful Debts

An estimated charge against profit for debts likely to become irrecoverable. It is created on debtors after deducting further bad debts and appears as a reduction of debtors.

Manufacturing Account

A statement computing cost of production from raw material consumed, direct labour, and factory overheads, adjusted for work-in-progress, then transferred to the trading account.

Drawings Treatment

Cash or goods withdrawn by the owner for personal use. Drawings are deducted from capital in the balance sheet and are never treated as an expense of the business.

Prime Cost

The total of direct material, direct labour, and direct expenses incurred in producing goods or services. It excludes all production overheads and non-production costs.

Cost Unit

A quantitative unit of product or service for which cost is ascertained, such as a tonne, a passenger kilometre, or one thousand bricks. It differs from a cost centre.

Overhead Absorption Rate

Budgeted overhead divided by the budgeted absorption base, such as labour hours or machine hours. It is used to charge indirect costs to products or jobs.

Semi-Variable Cost

A cost containing both fixed and variable elements, such as electricity with a standing charge plus usage. It is separated using the high-low method or scatter graph.

Contribution

Sales revenue minus variable costs. Contribution first covers fixed costs and any surplus becomes profit, making it central to marginal costing and break-even analysis.

Notional Profit

In contract costing, the value of work certified plus work uncertified minus cost incurred to date. Only a portion is credited to profit, based on degree of completion.

Equivalent Units

A measure converting partly finished work-in-progress into the number of complete units it represents. Process cost per unit equals total process cost divided by equivalent units.

Abnormal Loss

Loss exceeding the normal loss expected in a process, valued at the cost per good unit. It is credited to the process account and charged to the profit and loss account.

Marginal Costing

A technique where inventory and product cost include only variable costs. Fixed costs are treated as period costs and deducted from contribution to arrive at profit.

Standard Costing

A system recording predetermined costs for materials, labour, and overheads, then comparing them with actual costs to produce variances for management control and corrective action.

Job Costing

A method collecting costs for each job or batch on a job cost sheet. It suits customised production such as printing, furniture making, or construction work.

Cost Ledger Control Account

In a non-integrated cost ledger, this account records financial ledger transactions such as wages paid or materials purchased, and acts as the balancing link between the two ledgers.

Flexible Budget

A budget recast at the actual level of activity achieved. It is used in variance analysis so that differences are not distorted by changes in output volume.

Material Usage Variance

Standard quantity for actual output minus actual quantity used, multiplied by standard price. It measures efficiency in using materials and is valued at standard price.

Economic Order Quantity

The order size minimising total ordering and holding costs, calculated as the square root of twice annual demand times ordering cost, divided by holding cost per unit.

Relevant Cost

A future cost that differs between alternatives under consideration. Sunk costs, committed costs, and costs identical across options are excluded from the decision analysis.

Break-Even Point

The sales level at which total contribution equals fixed costs and profit is nil. In units it equals fixed cost divided by contribution per unit.

Margin of Safety

Actual or budgeted sales minus break-even sales. It shows how much sales can fall before a loss arises and may be expressed as a percentage of actual sales.

Limiting Factor Analysis

When a scarce resource restricts output, products are ranked by contribution per unit of that resource, and the available capacity is allocated in ranking order to maximise total contribution.