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339 Cards in this Set
- Front
- Back
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Accounting
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the process of identifying, measuring and communicating economic information about an entity to a variety of users |
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Business transactions
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Occurrences that affect the assets, liabilities and equity items in an entity and must be recognized (recorded)
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Bookkeeping
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The recording and summarizing of financial transactions and the preparation of basic reports |
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Internal users |
Managers of the entity who use the information to assist in various management functions
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External users (stakeholders)
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Parties outside the entity who use information to make decisions about the entity |
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Financial accounting
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Preparation and presentation of financial information for users to enable them to make economic decisions regarding the entity |
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Historical cost |
Original amount paid or expected to the received for an item |
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Financial statements |
A set of statements directed towards the common information needs of a wide range of users |
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Statement of cash flows
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Statement that reports on an entity's cash inflows and cash outflows for a specified period
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Income statement
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Statement that reports on the income and expenses of an entity for a period and the resulting profit or loss
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Balance Sheet
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Statement that reports on the assets, liabilities and equity of an entity at a particular point in time
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Management accounting |
Field of accounting that provides economic information for use by management in internal planning and decision making |
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Australian Securities and Investments Commission (ASIC) |
Government body responsible for regulating companies, company borrowings, and investment advisers and dealers |
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Corporations Act 2001 (Cwlth) |
National scheme of legislation, administered by ASIC, dealing with the regulation of companies and the securities and future industries in Australia
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Australian Securities Exchange (ASX)
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Australian marketplace for trading equities, government bonds and other fixed-interest securities
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Market Rules
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Rules governing the operations and behavior of participating entities of the ASX and affiliates |
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Listing Rules
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Rules governing the procedures and behavior of all ASX-listed companies |
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International Financial Reporting Standards (IFRS)
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Accounting standards that are prepared and issued by the International Accounting Standards Board (IASB) |
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Australian Accounting Standards Board (AASB)
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Australian body responsible for developing accounting standards for application to Australian entities |
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Disclosing entity |
An entity that issues securities that are quoted on a stock market or made available to the public via a prospectus |
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Financial Reporting council (FRC)
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A statutory body responsible for overseeing the accounting and auditing standard-setting process for both the public and private sectors in Australia
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Due process
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course of formal proceedings that are carried out in accordance with established rules and principles for protecting and enforcing different individual views associated with standard setting
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General purpose financial statements (GPFSs)
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Financial statements prepared to meet the information needs common to external users
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Special purpose financial statements (SPFSs)
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financial statements prepared to suit a specific purpose
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Fundamental qualitative characteristics
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the necessary qualitative characteristics of financial information
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Profit
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income less expenses for a reporting period
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Asset
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a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
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Liability
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a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
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Equity
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the residual interest in the assets of the entity after all its liabilities have been deducted
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Income
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Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets, or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants |
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Expenses
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Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants |
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Generally accepted accounting principles (GAAP) |
a set of rules and practices, having substantial authoritive support that guide financial reporting |
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Business sustainability
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the development that meets the needs of the present without comprising the ability of future generations to meet their own needs |
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Corporate social responsibility (CSR)
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An entity's obligations to society in general and to the environment |
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Stakeholder |
an individual or group with an interest in the entity
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Agency theory
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Theory which describes the relationship where one party (the principal) employs another (the agent) to perform some activity on their behalf |
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Shareholder value
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the view that holds that the purpose of the corporation is to maximize shareholder wealth |
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Stakeholder theory |
theory that espouses the purpose of the entity is for the good of all stakeholder groups (not just for the purpose of maximizing shareholder wealth) |
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Stewardship theory |
Theory that espouses that managers, left on their own, will indeed act as responsible stewards of the assets they control |
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Legitimacy theory
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Theory that entities must conduct operations in accordance with societal expectation |
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GRI reporting framework |
A sustainability framework that provides guidance on how organizations can disclose their sustainability performance |
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triple bottom line
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considers the economic, social and environmental performance of an entity |
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Corporate governance
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Direction, control and management of an entity
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Teleological theories
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theories concerned with the consequences of decisions |
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Deontological theories
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theories concerned with duty
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Utilitarianism
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Kantianism |
Theory proposed by Kant that an action is morally right if it is motivated by a goodwill that stems from a sense of duty |
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Accounting entity concept |
Business transactions are recorded separately from personal transactions involving the owner(s) because the business is regarded as a separate legal entity from the owner(s)
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Sole trader
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Individual who controls and manages a business, and is solely liable for all the business debts |
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Australian Business Number (ABN) |
Identifier issued by the Australian Tax Office (ATO) for certain dealings with the ATO and other government departments and agencies |
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Australian Taxation Office (ATO) |
The federal government's main revenue collection agency |
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Goods and services tax (GST) |
a broad-based indirect tax levied on supplies of goods and services |
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Unlimited liability |
when the individual or partnership is fully liable for all the debts of the entity |
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partnership |
Group of people who come together in business with a common goal of making a profit |
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partnership agreement |
Agreement between business partners that contains the details of that partnership |
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mutual agency
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Each partner is seen as an agent for the entity and has a right to enter into contracts for that entity |
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Company |
business structure that has a separate legal identity from its shareholders and is taxed on its taxable income |
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Shareholders |
part-owners of a company |
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Legal entity |
entity that is separate from its owners and recognized at law |
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Dividends |
distribution of company profit to shareholders |
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Limited Liability |
Shareholder Liability limited to the extent of the value of their shares or guarantee |
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Australian Company Number (ACN)
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A nine-digit number allocated to a company to ensure that it has adequate identification when transacting business. |
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Business activity statement (BAS)
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a single form used by entities registered for GST to report their business tax entitlements and obligations to the ATO. |
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Ordinary Shares
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the most commonly traded type of shares in Australia. Holders of ordinary shares are part-owners of a company and may receive payments in cash (called dividends). This class of shares has no preferential rights to dividends or capital on winding up
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Preference shares
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Shares that rank before ordinary shares in the event of liquidation of the issuing company and usually receive a fixed rate of return |
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Unlimited companies
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IPO (initial public offering)
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Offering (floating) shares to the public for the first time
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Trust |
A business structure in which a person holds property for others who are intended to benefit from the property or income of the property |
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Trustee |
A person or persons, or a proprietary limited company, personally liable for all debts and other liabilities incurred on behalf of the trust |
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Family (or discretionary) trust
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A business structure usually established for the benefit of one family and its members |
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Unit trust
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a business structure that is established for the benefit of various parties rather than family members |
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retained earnings
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cumulative profits made by the entity that have not been distributed as dividends or transferred to reserve accounts
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Differential reporting
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a framework under which entities have different reporting requirements |
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Arm's length distance |
parties deal with equal bargaining positions, neither party is subject to the other's control or dominant influence, and the transaction is treated with fairness, integrity and legality |
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entity concept
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separation of business transactions from any personal transaction of the owner(s) |
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Drawings |
Withdrawals of assets from the entity by the owner(s) that are recorded as decreases in equity |
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Source Documents |
Original documents verifying the business transaction |
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Cash transactions |
Business transaction involving the exchange of cash for goods or services |
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Credit transactions |
Business transactions involving the exchange of goods and services on the proviso that cash will be received at a later date |
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personal transaction |
transactions of the owner unrelated to the operations of the business |
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Business events |
Events that will probably affect the entity without any immediate exchange of goods and services between the entity and another entity |
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Accounting equation |
Expresses the relationship between the assets controlled by the entity and the claims on those assets |
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Journal |
an accounting record in which transactions are initially recorded in chronological order |
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Ledger |
an account that accumulates all of the information about changes in specific account balances |
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Chart of accounts |
a listing of the ledger account titles and their related numbers and/or alpha numbers |
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Trial balance |
a list of ledger account balances prepared at the end of the period |
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Single-entry error |
an error created by entering only one part of a transaction |
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Transposition error |
An error created by transposing (or switching) digits when recording transactions
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Reporting entity
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an entity with users who rely on the information in general purpose financial statements to meet their information needs |
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Public accountability
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entities with securities, debt or equity, traded in a public market or entities that hold assets in a fiduciary capacity as their main business activity |
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Investing decisions |
decisions involving (a) the acquisition and sale of investments and productive non-current assets using cash, and (b) lending money and collecting on those loans |
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Financing decisions |
Decisions involving the mix of debt and equity financing chosen by the entity |
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Duality |
describes how every business transaction has at least two effects on the accounting equation |
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Liquidity |
Ability of an entity to meet its short-term financial commitments |
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accounting policies |
rules and practices, having substantial authorative backing, that are recognized as a general guide for financial reporting |
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conceptual framework
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Document that sets out the objective of financial statements, assumptions underlying financial statements, and the qualitative characteristics of financial statements, and defines the elements of financial statements and the recognition of criteria applied to the elements |
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recognition
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Recording items in the financial statements with a monetary value assigned to them |
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Monetary concept |
Use of money as the basis of quantifying items in financial statements |
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contingent |
existence of an asset or liability arising from a past event that may be confirmed only by uncertain future events not controllable by the entity |
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Comparative Information
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presentation of he financial statements of an entity for multiple years |
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Parent entity |
entity that controls another entity |
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Group (economic entity) |
parent entity and all its subsidiaries |
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current asset |
cash and other assets that are expected to be converted to cash or used in the entity within one year or one operating cycle, whichever is longer |
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Non-current asset |
Assets that are not expected to be consumed or sold within one year or one operating cycle |
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Current liabilities |
obligations that can reasonably be expected to be paid within one year or one operating cycle |
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non-current liabilities |
obligations that are expected to be paid after one year or outside one normal operating cycle |
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Operating cycle |
length of time it takes for an entity to acquire and sell goods and collect cash from the sale |
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classes |
different types of asset, liability, and equity accounts found on the balance sheet |
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cash and cash equivalents
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cash held at bank, on hand and in short-term deposits |
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Trade receivables (trade debtors or accounts receivable)
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amounts due from customers for the sale of goods and services |
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Inventories (stock)
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supplies of raw materials to be used in the production process work-in-progress and/or the finished goods the entity has available for sale |
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Investments accounted for using the equity method
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Carrying value of investments in another entity has the capacity to control the investee entity |
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Financial asset |
cash, a contractual right to receive cash or another financial asset, a contractual right to exchange financial instruments with another entity under conditions that are potentially favorable, or an equity instrument of another entity calculated as the excess of consideration paid for a business over the fair value of the net assets at acquisition date |
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derivative financial asset
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financial asset whose value depends on the value of an underlying security, reference rate or index |
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Property, plant, or equipment |
long-term assets that have physical substance, are used in the operations of the entity and are not intended for sale to customers |
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Agricultural assets (biological assets)
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living animals or plants |
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Intangible assets |
Non-current, non-monetary assets that do not have physical substance |
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Identifiable intangible assets |
Intangible assets that can be identified (e.g. trademarks, brand names, patents, rights, agreements, development expenditure, mastheads, licenses).
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Goodwill
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An unidentifiable intangible asset (e.g. an established client base of reputation) |
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Receivables
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Cash the entity expects to receive from parties that owe it money |
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Trade payables (trade creditors or accounts payable) |
Amounts owed to suppliers for the purchase of goods or services |
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Provisions |
liability class involving more uncertainty regarding the monetary value assigned to the future sacrifice of economic benefits
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Financial liability
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Liability that is a contractual obligation to deliver cash or another financial asset to another entity or a contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity |
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Derivative financial liability
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financial liability whose value depends on the value of an underlying security, reference rate or index
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secured debt
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debt with a priority claim on the entity's assets in the event of the entity's demise |
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share capital |
funds contributed to a company by the owners |
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Paid-up share capital |
total amount paid by shareholders for shares issued in the company |
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Contributed capital |
Funds contributed to a partnership or sole trader by the owner (s) |
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Reserves
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equity accounts that originate in a variety of ways including asset revaluations (revaluation surplus), transfers of profits (general reserve) or movements in exchange rates (foreign currency translation reserve) |
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non-controlling interests
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claim on the net assets of the entity that belongs to the shareholders of an entity other than parent entity shareholders |
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carrying amount (book value)
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dollar value assigned to an asset or liability on the balance sheet
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Current cost |
Cost of replacing an asset or settling a liability today
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Realizable (settlement) value |
Amount that an entity can expect to receive from disposal of an asset or settlement of a liability in the normal course of business
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Present value
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Sum of the discounted cash flows associated with an item |
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Fair value
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The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date |
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Relevant
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Information that is of value to users in making and evaluating decisions about the allocation of scarce resources |
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Faithful representation
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Information that is complete, neutral and free from error |
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Allowance for doubtful debts
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Estimate of the amount of accounts receivable expected to be uncollectable |
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Net realizable value (inventory)
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Expected selling price less the expected costs associated with getting the inventory to saleable state, plus the costs of marketing, selling and distribution |
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Depreciable assets
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Non-current assets with limited useful lives |
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Depreciation |
Allocation of the depreciable amount of a depreciable asset over its estimated useful life |
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Accumulated depreciation |
Total depreciation charges for a particular asset |
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Recoverable amount |
Higher of an asset's expected fair value (less costs of disposal) and value in use |
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Value in use |
Present value of the expected cash flows associated with an asset's use and subsequent disposal |
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Impairment |
When an asset's carrying value exceeds it recoverable amount |
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Triple bottom line reporting or Environmental, social and governance (ESG) reporting |
Reporting on environmental, social and financial performance |
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Integrated reporting |
Reporting on the value created by the entity's strategy, governance, performance and prospects |
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Profit or loss |
Income less expenses for a reporting period |
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Revenue |
Income arising in the ordinary course of an entity's activities |
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Reporting period (accounting period) |
period of time to which the financial statements relate |
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Accrual accounting |
transactions and events are recorded in the periods they occur, rather than in the periods the cash is received or paid |
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Cash accounting |
Transactions are recorded in the period the cash is received or paid |
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Accrued income |
Amounts not yet received for goods or services that have been provided |
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Income received in advance |
Amounts received from customers and recognized as liabilities before the services are performed or the goods are provided |
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Accrued expense |
Amounts not yet paid for economic benefits used or consumed |
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Prepaid expenses (prepayments) |
Amounts paid in cash and recorded as assets until the economic benefits are used or consumed |
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Amortization |
Allocation of the cost of an intangible asset over its estimated useful life
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Contra account |
An account that is offset against another account |
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Straight-line depreciation |
Depreciation method that results in a constant depreciation expense each reporting period over the assets useful life |
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Diminishing balance depreciation |
Depreciation method that results in decreasing depreciation expense each reporting period over the asset's useful life. Also referred to as reducing balance depreciation |
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Units of production depreciation
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Depreciation method that results in a varying depreciation expense each reporting period over the asset's useful life. |
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Earning's management
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Managers' use of accounting discretion via accounting policy choices and/or estimates to report a desired level of profit |
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Distribution to owners
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The resources (dividends) distributed to owners |
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Cost of sales
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Cost of inventory sold during the period. |
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Periodic inventory |
Continuous records of inventory on hand and cost of sales are not maintained, the cost of sales is determined by the opening inventory balance plus purchases less closing inventory balance |
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Perpetual Inventory
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Continuous records of inventory on hand and cost of sales are maintained
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Material items
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items that are likely to influence a financial statement user's decision making |
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Cost of goods manufactured
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The total cost of materials, labor and overhead used in manufacturing the goods |
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Gross profit
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Excess of net sales revenue over the cost of sales |
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Earnings before interest and taxation (EBIT) |
Profit before net interest and taxation expense |
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Net finance costs
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Interest income less interest expense (including finance lease charges) |
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Earnings before interest, tax, depreciation and amortization (EBITDA)
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The profit before interest, taxation, depreciation/amortization expense |
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Pro forma earnings |
Earnings that are not in accordance with GAAP earnings |
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Other comprehensive income |
All changes in equity during the reporting period other than profit or loss and those resulting from transactions with owners as owners |
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Statement of comprehensive income |
Statement showing all items of income and expense during the reporting period, including those items recognized in determining profit or loss well as items of other comprehensive income taken directly to equity |
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Statement of changes in equity
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Statement showing the change in an entity's equity between two reporting periods |
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Working capital
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The difference between the amounts of current assets and current liabilities |
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Cash flows
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Cash movements resulting from transactions with parties external to the entity |
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Cash inflows
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Cash movements into the entity resulting from transactions with an external party |
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Cash outflows |
Cash movements out of the entity resulting from transactions with an external party |
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Cash |
Cash and cash equivalents
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Cash on hand
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Notes and coins, and deposits at call with a financial institution |
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Cash equivalents |
Highly liquid investments and short-term borrowings |
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Operating activities |
Relate to the provision of goods and services and other activities that are neither investing nor financing activities |
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Investing activities |
Those activities that relate to the acquisition and/or disposal of non-current assets (e.g. property, plant and equipment, and other productive assets and investments) not falling within the definition of cash |
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Financing activities |
Those activities that change the size and/or composition of the financial structure of the entity (including equity) and borrowings not falling within the definition of cash |
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Direct method |
Method of preparing a statement of cash flows that discloses major classes of gross cash receipts and gross cash payments |
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Indirect method |
Method of preparing a statement of cash flows that adjusts profit or loss for the effects of transactions of a non-cash nature and deferrals or accruals of operating revenue and expenses. (the indirect method is the reconciliation or the profit/loss with the cash flows from operating activities) |
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Trend analysis |
Method of examining changes, movements and patterns in data over a number of time periods. |
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Ratio analysis |
An examination of the relationship between two quantitative amounts with the objective of expressing the relationship in ratio or percentage form |
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Cash adequacy ratio |
Cash from operating activities divided by capital expenditure plus dividends paid |
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Cash flow ratio |
Measure of liquidity calculated as cash from operating activities divided by current liabilities |
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Debt coverage ratio
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Capital structure ratio calculated an non-current liabilities divided by cash from operating activities |
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Cash flow to sales ratio
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Measure of profitability calculated as cash from operating activities divided by net sales revenue
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Free cash flow
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The cash from operating activities less the amount spent on capital expenditure to maintain the existing level of operations |
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Fundamental analysis |
Analyzing many aspects of an entity to assess the entity
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Financial analysis |
Analyzing reported financial numbers to form opinions as the entity's past and future performance and positions |
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Profitability
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An entity's performance (profit) during the reporting period measured in relative terms |
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Horizontal analysis
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Analyzing a series of financial statement data over a period of time |
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Vertical analysis
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Analyzing financial statement data by expressing each item in a financial statement as a percentage of a base amount |
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Flow item |
item in the financial statements that is generated over a period of time |
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Stock item
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item in the financial statements as at a point in time
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Profitability ratios
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Measure of the profit relative to the resources available to generate the profit |
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Efficiency ratios |
Measure of sales generated per dollar invested in assets
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Liquidity ratios
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Measure of the short-term ability of the entity to pay its maturing obligations and to meet unexpected needs for cash |
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Market performance ratios (market test ratio) |
Ratios that generally relate the entity's financial numbers to the entity's share price |
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Return on Equity (ROE) |
Profitability ratio measuring profit earned for each dollar invested by the owners, calculated as profit available to owners divided by average equity
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Return on assets (ROA)
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Profitability ratio calculated as profit divided by average total assets
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Gross profit margin
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Profitability ratio calculated as gross profit divided by sales revenue |
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Profit margin |
Profitability ratio calculated as profit divided by sales revenue |
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Expense ratio |
Profitability ratio calculated as expenses divided by sales revenue |
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Asset efficiency ratios
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Measures of the efficiency with which an entity manages its current and non-current assets, and converts its assets decisions into sales dollars
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Asset turnover ratio
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Asset efficiency ratio calculated as sales revenue divided by average total assets |
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Days inventory
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Inventory efficiency ratio calculated as the average inventory balance divided by cost of sales and multiplied by 365 days |
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Days debtors |
Debtor efficiency ratio calculated by dividing the average trade debtors by sales revenue and multiplying by 365 days |
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Activity cycle (operating cycle)
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The length of time it takes for an entity to acquire goods, sell them to customers and collect the cash from the sale |
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Cash cycle
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The period of time that elapses between paying for the inventory, selling the inventory and receiving cash for the inventory |
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Current ratio (working capital ratio) |
Liquidity ratio calculated by dividing current assets by current liabilities |
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Quick ratio (acid-test ratio)
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Stringent liquidity ratio calculated as the sum of cash, marketable securities and net receivables divided by current liabilities |
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Capital structure
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An entity's financing decisions (i.e. how it finances its investments in assets) |
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Capital structure ratios
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Gearing ratios that measure how an entity finances its investments in assets |
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Debt ratio
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Capital structure ratio calculated by dividing total debt by total assets |
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Debt to equity ratio |
Capital structure ratio calculated as total liabilities divided by total equity |
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Equity ratio
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Capital structure ratio calculated by dividing total equity by total assets |
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Interest coverage ratio (times interest earned) |
Capital structure ratio calculated as EBIT divided by net finance costs |
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Net tangible asset backing (NTAB) per share |
Market performance ratio calculated as tangible assets divided by the number of issued shares |
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Earnings per share (EPS) |
Market performance ratio calculated as profit divided by the weighted average ordinary shares |
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Operating cash flow per share (CFPS) |
Market performance ratio calculated as cash flows from operating activities divided by weighted average ordinary shares on issue |
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Dividend per share (DPS)
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Market performance ratio calculated as ordinary dividends paid or provided out of current year's profits divided by the number of ordinary shares on issue |
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Dividend payout ratio |
Market performance ratio calculated as dividend per share divided by earnings per share |
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Price earnings ratio (PER) |
Market performance ratio calculated as the market price of the share divided by earnings per share |
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Strategic planning |
Process relating to the longer term planning (often three to five years) of the entity's activities, including issues such as expansion plans and radical product/service development |
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Budgeting
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Budgeting is a process that focuses on the short term, commonly one year, and results in the production of budgets that set the financial framework for that period |
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Performance management |
Setting targets in other than just financial terms (e.g customer service, corporate governance, management techniques, human resource management). |
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Budget |
Quantitative expression of an entity's plans |
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Budgeting process
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Process involving evaluating past performance, assessing and incorporating expectations, preparing estimates, and monitoring and adjusting budgets as required by changing circumstances
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Cash budget
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Statement of expected future cash receipts and cash payments |
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Master budget |
Set of interrelated budgets for a future period |
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Variance |
Difference between budgeted amounts and actual amounts |
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Authoritarian style of budgeting
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Participative style of budgeting
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Targets and budgets are arrived at by discussion and negotiation between senior management and unit managers |
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Budgetary slack |
Budget targets that could be more easily achievable than otherwise might be the case |
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Cost-volume-profit analysis |
Investigation of change in profits in response to changes in sales volume, costs and prices |
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Fixed costs |
Costs that remain the same in total (within a given range of activity and timeframe) irrespective of the level of activity |
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Variable costs |
Costs that change in total as the level of activity changes |
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Relevant range |
Activity range over which the fixed costs remain constant |
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Mixed costs |
Costs that possess fixed and variable characteristics |
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Break-even analysis |
Calculation of the necessary levels of activity required to break even in a given period |
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Contributed margin |
Calculated by deducting total variable costs from the total revenue |
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Contribution margin per unit |
Selling price per unit less variable cost per unit
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Margin of safety |
Excess of revenue (or units of sales) above the break-even point |
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Sales mix |
number of units of each product/service sold relative to the total number of units sols |
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Weighted average contribution margin (WACM) |
Sum of the contribution margin of each product weighted by the relative sales mix |
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Contribution margin ratio |
Contribution margin per unit divided by the selling price per unit |
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Operating leverage |
Mix between fixed and variable costs in the cost structure of an entity |
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Contribution margin per limiting factor |
Contribution margin per a limited resource |
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Relevant costs |
Costs that will be different under alternative courses of action |
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Relevant income |
Income that will be different under alternative courses of action |
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Incremental Income |
additional income gained for each additional unit |
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Incremental costs |
Additional costs incurred for each additional unit |
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Outsourcing decision |
Decision on whether to make or buy a product or service, or to outsource the production of that product or service. |
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Avoidable costs |
Costs avoided if an outsourcing decision is accepted |
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Unavoidable costs |
Costs incurred regardless of the decision taken regarding outsourcing a product or service |
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Outsourcing |
Purchase of goods or services from an external party
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Special order |
One-off customer order that is different from the orders usually received by the entity |
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Available capacity (idle capacity) |
Difference between maximum capacity and current operating capacity |
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Cost
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Resource, usually measured in monetary terms, used to achieve a particular organizational objective |
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Cost object
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Object with a separately measured cost |
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Costing system |
System used to allocate costs to cost objects
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Internal value chain
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Linked activities undertaken within an entity - from the inception of the product or service, to the final delivery to customers |
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Full cost |
Direct costs plus allocated indirect costs |
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Direct costs |
Costs that can be directly traced to a cost object |
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Cost/benefit test |
Assesses the costs and benefits of tracing costs to cost objects |
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Indirect costs (overheads)
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Costs that are not economically feasible to trace to the cost object |
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Cost allocation
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Assignment of indirect costs to the many cost objects that make use of the resource |
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Cost driver
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Measure of the activity, related to a cost pool, that is used to allocate costs |
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Allocation base |
Variable used to allocate costs from a cost pool to a cost object |
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Volume drivers
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Cost drivers that relate to the volume of output |
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Resource drivers |
Cost drivers that measure resource consumption by activities |
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Activity drivers |
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Activity hierarchy
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Framework that describes how overhead costs change with various activities |
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Cost pool
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Collection of similar costs |
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Indirect cost rate
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Total overhead costs for the cost pool divided by the total level of the cost driver |
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Predetermined indirect cost rate |
Estimated level of overhead cost divided by the estimated level of the cost driver (allocation base) |
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Inventoriable product costs |
Costs of converting raw materials into finished products
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Period costs
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Costs written off in the current accounting period
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Process costing system
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product costing system used by entities that produce large numbers of identical items in a continuous production process |
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Conversion costs
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Direct labor and overhead incurred to convert the direct materials to a finished product |
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Job costing system |
System of accounting for product costs that is sue by entities producing individual products or batches of products that are unique |
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Overapplied overhead
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When the indirect costs applied to an inventoriable product cost are greater than the actual costs incurred |
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Underapplied overhead
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When the indirect costs applied to an inventoriable product cost are less than actual costs incurred |
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Cost-based pricing |
Pricing method that applies a mark-up to some calculation of the product or services cost |
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Market-based pricing |
Pricing method based on some measure of customer demand |
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Peak-load pricing |
When different prices are charged at different times to reduce capacity restraints |
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Price skimming
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When a higher price is charged for a product or service at the time it is first introduced |
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Penetration pricing
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Setting prices low when new products are introduced to increase market share |
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Price discrimination |
Setting different price for different customers |
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Predatory pricing
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Setting prices low to drive competitors out of the market and the raising prices once competition is removed |
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Collusive pricing |
When two or more organizations conspire to set prices above a competitive price |
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Dumping
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When a foreign-based entity sells products in Australia at prices below the market value in the country where the product is produced, and the price could harm an Australian industry |
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Risk |
Measureable variation in outcomes
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Uncertainty |
Unmeasurable variation in outcomes |
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Accounting rate of return (ARR)
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Average profit over the period of the investment as a percentage of the average investment |
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opportunity cost
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Cost of forgoing benefits that would be available of the resources had been used in the next best alternative |
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Time value of money
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Notion that a dollar is worth more the sooner it is received, all other things being equal |
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Payback period (PP)
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Time necessary to recoup with net cash inflows the initial outlay |
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Net present value (NPV) |
Sum of the present values of the expected cash inflows from the project less the PVs of the expected cash outflows |
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Internal rate of return (IRR) |
Rate of return that discounts the cash flows of a project so that the present value (PV) of the cash inflows equals the PV of the cash outflows |
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Discount rate |
Interest rate at which a future cash flow is converted to a present value |
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Inflation |
Increase in the prices of goods and services |
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Deflation
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Decrease in the prices of goods and services |
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Dividend imputation scheme |
Scheme that allows investors (in companies that pay income tax) credits for their share of the tax already paid by companies |
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Hedging principle
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Matching the maturity of the source of funding with its use
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Permanent funding
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Funding with maturities greater than one year |
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Temporary funding |
Short-term formal sources of finance |
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Spontaneous sources of funding |
Sources of funding that arise in a substantially unplanned and unconstructed way in the ordinary course of business
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Insolvent entity |
Entity that is unable to pay its bills or meet its financial obligations on time |
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Overdraft
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Loan facility attached to a current (cheque) account |
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Factoring
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Gives the lender the right to collect the cash owing on invoices
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Installment loans
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Loans with fixed repayment schedules that are negotiated at the outset
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Fully drawn advances (FDAs)
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Loan initially drawn down to the full amount and repaid over the term of the loan by a fixed repayment schedule |
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Lease
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Contract by which an owner of property allows another person or entity the use of the asset
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Lessor
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Owner of a leased property |
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Lessee |
Person or entity who leases a property
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Novated lease
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Involves a three-party agreement between an employee, an employer and a financial institution to provide a motor vehicle to the employee as part of a salary package
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Hire-purchase agreement
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Involves a financial institution buying the equipment required by the customer and then hiring it to the customer for use during the agreed period in return for hire/rental payments |
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Finance leases |
Non-cancellable contractual obligations to make payments in return for the use of an asset for the majority of its useful life |
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Operating leases
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Contractual agreements that are cancellable upon given notice and tend to be of much shorter term than the useful life of the asset |
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Corporate bonds
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Unsecured loans that are contracted directly with investors in the debt markets and normally available only to entities with acceptable credit ratings |
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Debentures |
Loan instruments that are normally secured by a fixed or floating charge over assets |
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Rights issue |
issue of new shares to existing shareholders |
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Renounceable rights issue
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Rights issue where shareholders are free to sell their rights even though they may decline the right to subscribe more funds |
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Non-renounceable rights issue
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Rights issue where investors are not able to sell the rights even though they may decline the right to subscribe more funds |
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Option |
Right to subscribe to shares at a price and time that are predetermined |
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Hybrid debt securities |
Securities that have characteristics of both debt and equity |
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Convertible notes
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Notes that convert to the issuer's ordinary shares |
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Convertible preference shares |
Shares that convert at maturity to the issuer's ordinary shares |
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Direct investment |
Capital invested in an entity by an investor with significant influence over the key policies of the entity |
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Portfolio investment |
Investment where the investor has no control over the key policies of the entity |
