NZ Scholarship Accounting flashcards

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

Conceptual Framework objective

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Asset definition

A present economic resource controlled by the entity as a result of past events, where an economic resource is a right with the potential to produce economic benefits for the entity.

Liability definition

A present obligation of the entity to transfer an economic resource as a result of past events, which the entity has no practical ability to avoid.

Recognition criteria

An element is recognised when it meets the definition and recognising it, together with its measurement, provides relevant information and a faithful representation of the transaction.

Fundamental qualitative characteristics

Relevance, comprising predictive value, confirmatory value and materiality, and faithful representation, comprising completeness, neutrality and freedom from material error.

Materiality

Entity-specific judgement that information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions of the primary users of general purpose financial statements.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future, without intention or necessity to liquidate or curtail operations materially.

Accrual basis

Revenue is recognised when earned and expenses when incurred, regardless of when cash is received or paid, so profit reflects economic activity rather than cash timing.

Double-entry rule

Every transaction is recorded with equal total debits and credits; debits increase assets and expenses, while credits increase liabilities, equity and income.

Accounting equation

Assets equal liabilities plus equity. Equity may be expanded to opening capital plus profit plus contributions minus drawings, and the equation must hold after every entry.

Trial balance limitation

A balanced trial balance proves only that debits equal credits; errors of omission, commission, principle, original entry and complete reversal leave it balanced while misstating the accounts.

Suspense account

A temporary account holding one-sided or unbalanced entries; its balance must be cleared before financial statements are finalised, and clearing it usually changes reported profit.

Straight-line depreciation

Annual depreciation equals cost minus residual value, divided by useful life. The charge is constant, so carrying amount falls linearly over the asset's life.

Diminishing value depreciation

Depreciation equals the opening carrying amount multiplied by a constant rate, producing a higher charge in early years and a declining charge over the asset's life.

Bank reconciliation adjustments

Adjust the cash book for items the bank has already processed, such as direct credits, dishonoured cheques and bank charges; adjust the bank statement for unpresented cheques and deposits in transit.

Cost of goods sold formula

Under a periodic system, cost of goods sold equals opening inventory plus purchases minus closing inventory; under perpetual records it is updated at each sale.

Gross profit

Revenue less cost of goods sold. It measures trading margin before operating expenses, financing costs and tax, and is a key indicator of pricing and purchasing performance.

Return on equity

Profit attributable to owners divided by average ordinary shareholders' equity, expressing the return generated on owners' funds; it rises with leverage when returns exceed borrowing costs.

DuPont decomposition

Return on equity equals net profit margin multiplied by total asset turnover multiplied by the equity multiplier, separating profitability, efficiency and leverage effects on shareholder returns.

Current and quick ratios

Current ratio is current assets divided by current liabilities; the quick ratio excludes inventory and prepayments, giving a stricter test of short-term liquidity.

Interest cover

Profit before interest and tax divided by interest expense, indicating how many times operating earnings cover finance costs; a low figure signals solvency risk.

Cash flow quality

Comparison of cash from operations with reported profit; persistent divergence suggests accrual build-up in receivables or inventory, or capitalised costs inflating profit.

Break-even units

Fixed costs divided by contribution per unit, where contribution per unit equals selling price less variable cost per unit. It is the volume at which profit is zero.

Margin of safety

Actual or budgeted sales minus break-even sales, divided by actual or budgeted sales, expressed as a percentage; it measures how far sales can fall before a loss arises.

Relevant cost

A future, incremental cash flow that differs between alternatives. Sunk costs, committed costs and allocated common fixed costs are excluded from the decision.

Opportunity cost

The contribution forgone from the next best alternative use of a scarce resource; it is relevant whenever capacity is constrained and an alternative use exists.

Absorption versus variable costing

Absorption costing includes fixed production overhead in product cost; variable costing expenses it as a period cost. Profit differs by the change in inventory units times fixed overhead per unit.

Predetermined overhead rate

Budgeted overhead divided by budgeted activity base, used to apply overhead to production; the difference between applied and actual overhead is under- or over-application.

Material price variance

Standard price minus actual price, multiplied by actual quantity purchased. A positive result is favourable; it isolates purchasing performance from usage efficiency.

Material usage variance

Standard quantity for actual output minus actual quantity used, multiplied by standard price. It isolates production efficiency from price effects.

Flexible budget

A budget restated for the actual activity level achieved, isolating volume effects from price and efficiency effects when compared with actual results.

Net present value

The sum of future cash flows discounted at the cost of capital, less the initial outlay. A positive NPV adds value and is the preferred investment appraisal criterion.