KASNEB CS25 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 the equation in balance, forming the basis of the statement of financial position.

Accrual concept

Revenue is recognised when earned and expenses when incurred, regardless of cash timing. It underpins matching of costs with the income they generate.

Straight-line depreciation

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

Trial balance

A list of ledger balances proving total debits equal total credits. It detects arithmetic errors but not errors of principle, omission or compensating errors.

Lower of cost and NRV

Inventory is measured at the lower of cost and net realisable value. This prevents assets being carried above the amount they can realistically realise.

Net present value

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

Internal rate of return

The discount rate at which a project's NPV equals zero. Projects are accepted when the IRR exceeds the required rate of return.

Weighted average cost of capital

The blended cost of equity and after-tax debt, weighted by market values. It is the minimum return a firm must earn on average-risk investments.

Capital asset pricing model

Required return equals the risk-free rate plus beta multiplied by the market risk premium. Beta measures the sensitivity of returns to market movements.

Dividend growth model

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

Payback period

The time taken for cumulative cash inflows to recover the initial investment. It ignores cash flows after the cut-off and the time value of money.

Five Cs of credit

Character, capacity, capital, collateral and conditions. They structure an assessment of willingness and ability to repay a facility.

Expected credit loss

Probability of default multiplied by loss given default and exposure at default. It quantifies the average loss expected on a credit exposure.

Loss given default

The proportion of an exposure expected to be lost if a borrower defaults, after allowing for recoveries from collateral and guarantees.

Aging analysis of receivables

A report grouping trade receivables by days overdue. Growing balances in the oldest buckets signal deteriorating collectability and possible provisioning.

Cost of foregoing discount

The annualised cost of not taking a cash discount, calculated as the discount rate over its complement, annualised over the payment period.

Negative loan covenant

A contractual undertaking by a borrower not to take specified actions, such as further borrowing, asset sales or dividend payments, without lender consent.

Agency problem

Conflict arising when managers, who control the firm, pursue their own interests rather than those of the shareholders who own it.

Audit committee

A board committee of independent non-executive directors overseeing financial reporting, external audit and internal control. It preserves auditor independence from management.

Segregation of duties

No single person should authorise, record and take custody of the same asset. This reduces the risk of error and fraud going undetected.

COSO control components

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

Span of control

The number of subordinates reporting to one manager. A narrow span gives closer supervision but creates a taller, costlier hierarchy.

Risk response options

Avoid, reduce, transfer or accept. Management selects a response based on the assessed likelihood and impact of each identified risk.

CIA triad

Confidentiality, integrity and availability are the three core objectives of information security and frame most control design decisions.

Least privilege

Users are granted only the access needed to perform their duties. It limits the damage that error, misuse or a compromised account can cause.

Three-two-one backup rule

Keep at least three copies of data, on two different media types, with one copy stored off-site to survive a local disaster.

Recovery point objective

The maximum tolerable amount of data loss, measured in time. It drives backup frequency and replication design in continuity planning.

Application controls

Controls over input, processing and output within a specific system, such as validation checks and reconciliation, ensuring completeness and accuracy of transactions.

Contract essentials

Offer, acceptance, consideration, intention to create legal relations and capacity. Absence of any element may prevent an enforceable contract arising.

Break-even point

The sales volume at which total contribution equals fixed costs, giving zero profit. Calculated as fixed costs divided by contribution per unit.

Margin of safety

The excess of actual or budgeted sales over break-even sales, expressed as a percentage. It measures how far sales can fall before a loss arises.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one.