KASNEB CPA Intermediate flashcards

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

Separate legal personality

The principle that a registered company is a legal person distinct from its members, so it owns property, contracts, and bears liabilities in its own name.

Ultra vires

An act beyond the objects and powers conferred on a company by its memorandum. Such acts are void at common law and may be restrained by injunction.

Foss v Harbottle rule

The proper plaintiff for a wrong done to a company is the company itself, so individual members generally cannot sue for wrongs against the company.

Distributable profits

Accumulated realised profits less accumulated realised losses of a company. Dividends may lawfully be paid only out of this amount, not out of capital.

Oppression remedy

A statutory petition by a member alleging that company affairs are conducted in a manner oppressive or unfairly prejudicial, seeking a remedial court order.

WACC

Weighted average cost of capital: the blended cost of equity and after-tax cost of debt, weighted by their market values in the capital structure.

Capital asset pricing model

A model pricing equity as the risk-free rate plus beta times the market risk premium, capturing only systematic risk in the required return.

Net present value

The sum of discounted future cash flows from a project less its initial investment. A positive NPV indicates the project adds value.

Internal rate of return

The discount rate at which a project's net present value equals zero. A project is accepted when its IRR exceeds the cost of capital.

Profitability index

Present value of a project's cash inflows divided by its initial investment. Used to rank projects when capital is rationed; accept if above one.

Operating gearing

The proportion of fixed costs in a firm's cost structure. High operating gearing makes profit more sensitive to changes in sales volume.

Working capital cycle

Inventory days plus receivables days minus payables days. It measures the period between paying suppliers and collecting cash from customers.

IFRS 15 five steps

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

Right-of-use asset

Under IFRS 16, the lessee recognises an asset representing its right to use a leased asset, measured initially at the present value of lease payments.

Expected credit loss

The IFRS 9 measure of impairment: a probability-weighted estimate of cash shortfalls over the expected life of a financial asset.

Goodwill on consolidation

Consideration transferred plus non-controlling interest plus prior holdings, less the fair value of net identifiable assets acquired in a business combination.

DuPont decomposition

A breakdown of return on equity into net profit margin, asset turnover, and equity multiplier, showing the drivers of shareholder returns.

Recoverable amount

Under IAS 36, the higher of an asset's fair value less costs of disposal and its value in use. Impairment arises when carrying amount exceeds this.

Audit risk model

Audit risk equals inherent risk times control risk times detection risk. Detection risk is the residual risk that audit procedures fail to detect misstatement.

Performance materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that aggregate uncorrected misstatements exceed materiality.

Appropriate audit evidence

Evidence that is relevant to the assertion being tested and reliable in source. External, documentary evidence is generally more reliable than internal oral evidence.

Going concern assumption

The presumption that an entity will continue operating for the foreseeable future, assessed by the auditor over at least twelve months from the reporting date.

Qualified audit opinion

An opinion stating that, except for the effects of a matter, the financial statements give a true and fair view. Used when misstatement is material but not pervasive.

Sampling risk

The risk that an auditor's conclusion based on a sample differs from the conclusion that would be reached by testing the entire population.

Contribution per unit

Selling price per unit less variable cost per unit. It measures how much each unit sold contributes towards covering fixed costs and generating profit.

Break-even point

The level of activity at which total contribution equals fixed costs, so profit is zero. In units it equals fixed costs divided by contribution per unit.

Margin of safety

The excess of budgeted or actual sales over break-even sales, expressed as a percentage of budgeted sales, indicating the cushion before losses arise.

High-low method

A technique separating fixed and variable costs by dividing the change in total cost between highest and lowest activity levels by the change in activity.

Material price variance

The difference between standard and actual price multiplied by actual quantity purchased or used, measuring purchasing efficiency against standard.

Relevant cost

A future, incremental cash flow that differs between alternatives. Sunk costs and apportioned fixed costs are excluded from decision-making.

Public good

A good that is non-rival in consumption and non-excludable, so markets under-provide it and government provision or financing is typically required.

Progressive tax

A tax structure in which the average tax rate rises as the taxable base increases, so higher-income taxpayers bear a larger proportionate burden.

Tax evasion

Illegal avoidance of tax through non-disclosure or misrepresentation of facts, attracting penalties and possible criminal prosecution.

Value added tax

A multi-stage tax charged on value added at each stage of production, with input tax credited against output tax so the burden rests on final consumers.