KASNEB CA26 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 keeps this balance because double entry records equal debits and equal credits for each event.

Accrual basis

Income and expenses are recognised when earned or incurred, not when cash moves, so revenues are matched with the costs that generated them.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue operating for the foreseeable future, without intention or necessity to liquidate.

Straight-line depreciation formula

Annual charge equals cost less residual value, divided by useful life in years; it spreads depreciation evenly over the asset's expected life.

Lower of cost and NRV

IAS 2 requires inventory to be measured at the lower of cost and net realisable value, so damaged or obsolete stock is written down.

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.

Error of principle

A bookkeeping mistake where a transaction is posted to the wrong class of account, such as capital expenditure treated as revenue; the trial balance still balances.

Net present value rule

Accept a project when the present value of cash inflows exceeds the present value of outflows; a positive NPV at the cost of capital adds value.

Weighted average cost of capital

Equity weight times cost of equity plus debt weight times after-tax cost of debt, where weights are based on market values.

CAPM required return

Cost of equity equals the risk-free rate plus beta multiplied by the market risk premium, where beta measures systematic risk.

Gordon growth model

Share price equals next year's dividend divided by the required return minus the constant dividend growth rate.

Internal rate of return

The discount rate at which a project's net present value equals zero; the project is accepted if the IRR exceeds the required return.

Cash conversion cycle

Inventory days plus receivable days minus payable days; it measures how long cash is tied up in operating working capital.

Interest rate risk on bonds

Bond prices fall when market yields rise; longer-maturity and lower-coupon bonds are more sensitive to changes in yield.

Five Cs of credit

Character, capacity, capital, collateral and conditions; a framework for judging a borrower's willingness and ability to repay.

Expected credit loss

Probability of default multiplied by loss given default multiplied by exposure at default, giving the monetary loss expected on a facility.

Debt service coverage ratio

Net operating income divided by total debt service; lenders typically require a ratio above one so that cash flow covers repayments.

Loan-to-value ratio

Loan amount divided by collateral value; a higher LTV means a smaller collateral cushion and a higher loss given default.

Credit scoring cut-off

A threshold score above which applications are approved; it is set by balancing approval volume against expected default losses.

Receivables ageing schedule

Classification of debts by days past due, such as 30, 60 and 90 days, used to estimate impairment and target collection effort.

Agency problem

Conflict arising when managers who do not own the firm pursue their own interests rather than shareholders'; addressed by incentives, monitoring and independent boards.

Three lines model

Management owns risk first, risk and compliance functions oversee second, and internal audit provides independent assurance as the third line.

Audit committee independence

A committee of independent non-executive directors that oversees financial reporting, external audit and internal control without executive interference.

Apply and explain

A governance approach requiring entities to apply all principles and explain how each has been applied, rather than merely justifying departures.

Segregation of duties

Splitting authorisation, custody, recording and reconciliation among different people so no single person can conceal errors or commit fraud undetected.

Risk treatment options

Avoid, reduce, transfer or accept; the choice depends on assessed likelihood and impact measured against the entity's risk appetite.

CIA triad

Confidentiality, integrity and availability: the three core objectives of information security used to classify assets and design controls.

RTO and RPO

Recovery time objective is the maximum acceptable downtime; recovery point objective is the maximum acceptable data loss measured in time.

Three-two-one backup rule

Keep at least three copies of data on two different media, with one copy stored offsite or offline to survive ransomware and site loss.

Least privilege principle

Users are granted only the access rights required for their duties, which limits damage from compromised or misused accounts.

Symmetric versus asymmetric encryption

Symmetric encryption uses one shared key for both operations; asymmetric encryption uses a public-private key pair with the public key distributed openly.

General IT controls

Controls over the IT environment such as access management, change control, operations and backup that support reliable application processing.