KASNEB CA24 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 capital. Every transaction changes at least two elements while keeping this equality intact, forming the basis of double-entry bookkeeping.

Accrual concept

Revenue is recorded when earned and expenses when incurred, regardless of cash timing. It matches costs to the revenues they helped generate in the same period.

Trial balance

A list of all ledger balances at a date. Total debits must equal total credits; inequality reveals arithmetic or posting errors, though some errors remain hidden.

Straight-line depreciation

An equal depreciation charge each year, computed as cost less residual value, divided by useful life. It suits assets whose benefits are consumed evenly over time.

Lower of cost and NRV

IAS 2 requires inventory to be measured at the lower of cost and net realisable value, so unrealised losses from falling prices are recognised immediately.

Bank reconciliation

A statement explaining differences between the cash book and bank statement, typically unpresented cheques, uncredited deposits, bank charges and errors, to derive the corrected balance.

Current ratio

Current assets divided by current liabilities. It indicates short-term liquidity; a value below one suggests current obligations exceed resources expected to convert to cash within a year.

Going concern assumption

Financial statements are prepared assuming the entity will continue operating for the foreseeable future, without intention or need to liquidate or curtail operations materially.

Net present value

The sum of discounted future cash flows minus the initial investment. A positive NPV means the project adds value at the given cost of capital.

Internal rate of return

The discount rate that makes a project's NPV zero. A project is acceptable when its IRR exceeds the required rate of return, subject to ranking limitations.

Payback period

The time taken for cumulative cash inflows to recover the initial outlay. It is simple and liquidity-focused but ignores cash flows after payback and time value.

Weighted average cost of capital

The blended required return on a firm's debt and equity, weighted by market values. It is the discount rate used for average-risk investment appraisal.

Capital asset pricing model

Ke equals the risk-free rate plus beta times the market risk premium. Beta captures systematic risk; unsystematic risk is assumed diversifiable and unrewarded.

Dividend growth model

Cost of equity equals next year's dividend divided by current share price, plus the expected dividend growth rate. It assumes constant perpetual growth.

Profitability index

Present value of a project's cash inflows divided by its initial investment. Values above one indicate positive NPV and help rank projects under capital rationing.

Future value of a sum

The value of a present amount compounded forward: FV equals PV multiplied by one plus the rate raised to the number of periods.

Risk and return trade-off

Higher expected returns require accepting higher risk. Investors demand a premium for bearing risk, which underpins the cost of capital and portfolio theory.

Five Cs of credit

Character, capacity, capital, collateral and conditions. Lenders assess integrity, repayment ability, owner stake, security and economic environment before granting credit.

Credit scorecard

A statistical model assigning points to applicant characteristics to predict default probability. Scores above a cut-off are accepted; below are rejected or reviewed.

Receivables collection period

Trade receivables divided by credit sales, multiplied by 365. It measures average days to collect debts; lengthening periods tie up working capital.

Cost of foregoing discount

The annualised cost of not taking a cash discount, computed as discount over one minus discount, times 365 over the extra credit days.

Expected credit loss

Under IFRS 9, an allowance based on probability-weighted, forward-looking estimates of default and loss given default, recognised before default actually occurs.

Aging analysis of debtors

Grouping receivables by how long they are overdue. Older buckets carry higher expected loss rates, guiding provisioning and collection effort.

Credit risk mitigation

Techniques reducing loss on default, including collateral, guarantees, credit insurance, netting arrangements and exposure limits per counterparty.

Working capital cycle

Inventory days plus receivables days minus payables days. A shorter cycle frees cash; a longer cycle increases financing needs.

Agency problem

Managers acting as agents may pursue personal goals over owners' interests. Monitoring, independent boards and performance-linked pay are common control mechanisms.

Separation of duties

No single individual should authorise, record and safeguard the same transaction. Splitting these functions reduces fraud and error risk.

Audit committee independence

A board committee of independent non-executive directors overseeing external audit, internal controls and financial reporting, strengthening objectivity and reducing management influence.

COSO control components

Control environment, risk assessment, control activities, information and communication, and monitoring. Together they form a framework for evaluating internal control systems.

Span of control

The number of subordinates directly reporting to a manager. Wide spans flatten structures and need more delegation; narrow spans create taller hierarchies.

Maslow's hierarchy of needs

Needs ordered from physiological through safety, social and esteem to self-actualisation. Lower-level needs are pursued before higher ones motivate behaviour.

Budget variance analysis

Comparing actual results with budgeted figures. Favourable variances raise profit; adverse variances reduce it, and significant variances prompt management investigation.