ITC Entrance Exam cheat sheet

Accounting equation: Assets = Liabilities + Equity; every transaction preserves it, so debits always equal credits in amount.

Accrual basis records revenue when the performance obligation is satisfied and expenses when incurred, regardless of cash timing; cash basis records only on cash movement.

Adjusting entries fall into four types: prepaid expense, unearned revenue, accrued revenue, accrued expense; each pairs one income statement and one statement of financial position account.

Closing entries zero temporary accounts (revenues, expenses, dividends/drawings) into retained earnings; permanent accounts carry forward.

Depreciation methods: straight-line = (cost − residual)/useful life; double-declining = 2 × straight-line rate × carrying amount, ignoring residual until the final year.

Inventory cost flow: FIFO leaves the newest costs in ending inventory; weighted average smooths price changes; LIFO is prohibited under IFRS.

Lower of cost or net realizable value (IFRS/GAAP for inventory) writes inventory down; reversal of the write-down is permitted under IFRS, not under US GAAP.

Under IFRS, development costs are capitalized when technical feasibility and intent to complete are demonstrated; research costs are always expensed.

Cost classification: product costs (direct materials, direct labor, manufacturing overhead) attach to inventory; period costs (selling, administrative) are expensed as incurred.

Contribution margin = Sales − Variable costs; contribution margin ratio = CM/Sales; it feeds break-even units = Fixed costs / CM per unit.

Break-even in revenue = Fixed costs / CM ratio; target profit volume = (Fixed costs + Target profit) / CM per unit.

Margin of safety = Actual (or budgeted) sales − Break-even sales; expressed in units, currency, or as a percentage of sales.

High-low method: variable cost per unit = (Cost at high activity − Cost at low activity) / (High activity − Low activity); fixed cost = total cost − variable portion.

Predetermined overhead rate = Estimated total overhead / Estimated allocation base; applied overhead = rate × actual base; under/overapplied = applied − actual.

Relevant costs for a decision are future and differ between alternatives; sunk costs and allocated common fixed costs are irrelevant.

Standard costing variances: materials price = (SP − AP) × AQ purchased; materials quantity = (SQ − AQ) × SP; labor rate = (SR − AR) × AH; labor efficiency = (SH − AH) × SR.

Absorption costing defers fixed manufacturing overhead in inventory; variable costing expenses it, so absorption profit is higher when inventory rises.

Tax base concepts: proportional (flat rate), progressive (rate rises with base), regressive (effective rate falls as base rises); marginal rate applies to the next unit of income.

Taxable income = gross income − allowable deductions − exemptions; tax liability = tax on taxable income − credits − prepayments.

Residence versus source: most systems tax residents on worldwide income and non-residents only on source-country income, with double-tax relief by credit or exemption.

Permanent differences (e.g., non-deductible fines) never reverse; temporary differences (e.g., accelerated tax depreciation) reverse and create deferred tax.

Deferred tax asset/liability = temporary difference × expected tax rate on reversal; recognize DTA only when recovery is probable.

VAT/GST is a multi-stage tax on value added; input tax is creditable against output tax, and the burden falls on the final consumer.

Transfer pricing: intra-group transactions should follow the arm's length principle; OECD methods include comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split.

Withholding tax is collected by the payer on payments such as dividends, interest, royalties, and service fees, typically at a flat statutory rate.

Contract formation requires offer, acceptance, consideration (or a valid substitute such as a seal or promissory estoppel), capacity, and legality; intention to create legal relations is presumed in commercial dealings.

An offer terminates by revocation before acceptance, rejection, lapse of time, death of the offeror, or failure of a condition precedent.

Agency: the principal is bound by acts of an agent with actual authority (express or implied) or apparent authority where the third party reasonably relied on the principal's representation.

Company law fundamentals: separate legal personality, limited liability of shareholders, and duties of directors (care, loyalty, no conflict of interest, no insider dealing).

Insolvency preference and fraudulent trading rules allow courts to unwind transactions that unfairly favor creditors within a specified look-back period.

Ethical frameworks: deontology judges the act by duty and rules; utilitarianism judges by consequences for total welfare; virtue ethics judges by the character of the actor.

The fraud triangle: pressure/incentive, opportunity, and rationalization; controls target opportunity, the element most responsive to internal control.

Independence in fact versus independence in appearance: both are required for auditors and professional accountants; familiarity, self-interest, and intimidation are common threats.

Audit risk model: Audit risk = Inherent risk × Control risk × Detection risk; detection risk is the only component the auditor controls through the nature, timing, and extent of procedures.

Assertions tested: existence/occurrence, completeness, rights and obligations, valuation/allocation, presentation and disclosure; cut-off applies to transactions.

Audit evidence is more reliable when obtained from independent external sources, from the auditor's direct observation, and from original documents rather than copies.

Materiality is set at the planning stage and revised if new information arises; performance materiality is lower than overall materiality to allow for undetected misstatements.

Sampling risk versus non-sampling risk; attribute sampling tests control deviation rates, variables sampling estimates monetary misstatement.

Types of opinion: unmodified, qualified (material but not pervasive), adverse (material and pervasive), and disclaimer (inability to obtain sufficient evidence, material and pervasive).

Going concern: the auditor evaluates management's assessment over at least 12 months; a material uncertainty is disclosed, not necessarily a modified opinion.

Internal control five components (COSO): control environment, risk assessment, control activities, information and communication, and monitoring activities.

Time value of money: FV = PV(1 + r)^n; PV = FV/(1 + r)^n; annuity PV uses the discount factor (1 − (1 + r)^−n)/r.

Net present value = PV of cash inflows − initial outlay; accept if NPV > 0; IRR is the rate where NPV = 0, and IRR is unreliable with non-conventional cash flows.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate); use market values of debt and equity, not book values.

CAPM: required return = risk-free rate + beta × (market return − risk-free rate); beta measures systematic risk only.

Price elasticity of demand = % change in quantity demanded / % change in price; demand is elastic when the absolute value exceeds 1.

Demand and supply shifts: a change in price moves along the curve (quantity demanded); a change in income, tastes, or related-good prices shifts the curve.

Market structures: perfect competition (price taker, zero long-run economic profit), monopoly (price maker, barriers to entry), oligopoly (strategic interdependence), monopolistic competition (product differentiation).

GDP = C + I + G + (X − M); real GDP uses constant prices, nominal GDP uses current prices; the GDP deflator = nominal/real × 100.