IAI CAFB - Certificate in Accounting, Finance and Business flashcards

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

Accounting equation

Assets equal liabilities plus equity. Every transaction affects at least two elements while keeping the equation balanced, which is why total debits equal total credits.

Accrual basis

Revenue is recognised when performance obligations are satisfied and expenses when incurred, regardless of cash timing. Cash-basis accounting instead records items only on cash movement.

IAS 2 inventory measurement

Inventory is measured at the lower of cost and net realisable value. Permitted cost formulas are FIFO and weighted average cost; LIFO is prohibited under IFRS.

IFRS 15 five-step model

Identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognise revenue when each obligation is satisfied.

Contribution margin

Sales revenue minus variable costs. It measures the amount available to cover fixed costs and then generate profit, and it drives break-even and target-profit calculations.

Break-even units

Fixed costs divided by contribution per unit. It is the sales volume at which total contribution exactly equals fixed costs and profit is zero.

High-low method

Variable cost per unit equals the change in total cost divided by the change in activity between the highest and lowest activity levels. Fixed cost is the residual.

Overhead absorption rate

Budgeted production overhead divided by the budgeted activity base. Applied overhead minus actual overhead gives the under- or over-absorption for the period.

Relevant cost

A future, differential cash flow that changes between alternatives. Sunk costs and allocated common fixed costs are excluded because they do not differ.

Net present value

Present value of expected cash inflows minus the initial investment, discounted at the cost of capital. Positive NPV means the project adds shareholder value.

Weighted average cost of capital

The market-value-weighted average of the after-tax cost of debt and the cost of equity. It is the discount rate used for average-risk investment appraisal.

Capital asset pricing model

Cost of equity equals the risk-free rate plus beta multiplied by the market risk premium. Beta captures systematic risk, which cannot be diversified away.

Cash conversion cycle

Inventory days plus receivable days minus payable days. A shorter cycle means cash is tied up for less time and less working capital financing is needed.

Financial gearing

The proportion of debt in the capital structure. Higher gearing increases fixed interest obligations and magnifies the volatility of returns to shareholders.

Contract essentials

Offer, acceptance, consideration, intention to create legal relations and capacity. If any element is missing, the agreement is generally not enforceable as a contract.

Invitation to treat

An invitation to negotiate rather than an offer, such as an advertisement or shop display. The customer makes the offer, which the seller may accept or reject.

Separate legal personality

A company is a legal person distinct from its owners, so it contracts and owns assets in its own name and shareholders' liability is limited to unpaid capital.

Wrongful trading

Continuing to trade when directors know or ought to know insolvency is unavoidable. Directors may become personally liable for losses to creditors after that point.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Absolute values above one indicate elastic demand, so price rises reduce total revenue.

Profit maximisation rule

A firm maximises profit where marginal revenue equals marginal cost. Producing beyond that point adds more cost than revenue and reduces total profit.

Demand-pull inflation

Inflation caused by aggregate demand growing faster than productive capacity. It contrasts with cost-push inflation, which stems from rising input costs or supply shocks.

Comparative advantage

Specialising where opportunity cost is lowest raises total output through trade, even if one country is absolutely more efficient at producing every good.

Porter's five forces

Rivalry, new entrants, substitutes, buyer power and supplier power. Strong forces erode industry profitability and shape where a firm positions itself.

Ansoff matrix

Four growth options ranked by risk: market penetration, product development, market development and diversification. Diversification carries the highest risk.

BCG matrix

Classifies units by market growth and relative market share as stars, cash cows, question marks or dogs, guiding investment and divestment decisions.

SMART objectives

Objectives that are specific, measurable, achievable, relevant and time-bound. They allow progress to be tracked against defined performance indicators.

Ethical threat categories

Self-interest, self-review, advocacy, familiarity and intimidation. Each threat is evaluated for significance and addressed with safeguards or by declining the engagement.

Confidentiality principle

Professionals must not disclose client information without authority, except where required by law or regulation. The duty continues after the relationship ends.

Professional scepticism

Questioning information and evidence and remaining alert to signs of misstatement or fraud. It does not mean assuming every client is dishonest.

Analytics maturity levels

Descriptive analytics reports what happened, diagnostic explains why, predictive forecasts what will happen, and prescriptive recommends the best action.

IT general controls

Controls over the whole IT environment: access management, segregation of duties, change management, backup and recovery, and logging. They underpin reliance on application controls.

Benford's law

In many natural datasets, leading digits occur with predictable frequency, with one appearing about 30 percent of the time. Large deviations may indicate error or fabrication.