CIMA C02 Key Terms

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Flashcards on CIMA C02 Key Terms, created by nacnim on 11/29/2015.

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Question Answer
Financial accounting The preparation of acounting reports for external use
Management accounting The preparation of accounting reports for internal use
Capital A special form of liability, representing the amount owed by the business to its proprietors; the excess of its assets over its liabilities
Business An organisation which sells something or provides a service with the objective of profit
Limited liability The liability of a shareholder to the company is limited to any unpaid amounts for shares issued by the company to the shareholder
Asset Something valuable which the business owns; this in effect represents a right of the business to future economic benefits
Liability Something which is owed to someone else
Tangible assets Assets with a physical presence, aka property, plant and equipment
Intangible assets Assets with no physical presence, aka intellectual property
Drawings Amounts taken out of a business by its owner
Payable A person to whom a business owes money and is therefore a liability of a business
Receivable A person who owes money to the business and is therefore an asset of the business
Current liabilities Debts of the business that must be paid within a fairly short period of time, by convention normally a year
Non-current liability Debt not payable within the 'short term', so any liability not current must be long-term
Tangible non-current asset Physical asset, has real 'solid' experience
Intangible non-current asset Asset with no physical existence, cannot be 'touched'
Current asset Either (a) items owned by the business with the intention of turning them into cash within one year; or (b) cash, inc money in the bank, owned by the 'business'
Income statement A statement showing in detail how the profit (or loss) of a period has been made
Gross profit The difference between the value of sales and the cost of the goods sold
Net profit Gross profit + Income from other sources - Other business expenses
Sales day book Lists all invoices sent out to customers
Purchase day book Lists all invoices received from suppliers
Sales returns day book Lists goods (or services) returned (or rejected) by customers for which credit notes are issued
Purchase returns day book Lists goods (or services) returned to suppliers (or rejected) for which credit notes have been received or are expected
Nominal ledger An accounting record which summarises the financial affairs of a business; contains accounts for each asset, liability, capital, income, expenditure and profit and loss
Journal Record of unusual transaction; used to record any double entries made which do not arise from the other books of prime entry
Going concern Implies business will continue in operation for the foreseeable future and that there is no intention to put the company liquidation or to make drastic cutbacks to the scale of operations
Accruals concept States that in computing profit, amounts are included in the accounts in the period when they are earned or incurred, not received or paid
Prudence Concept that specifies in situations where there is not uncertainty, appropriate caution is exercised in recognising transactions in financial records
Consistency concept states that in preparing accounts consistency should be observed in two respects: (a) Similar items items within a single set of accounts should be given similar accounting treatment, (b) the same treatment should be applied from one period to another in accounting for similar items
Materiality A matter is material if its omission or misstatement would reasonably influence the decisions of a user of the accounts
Substance over form The principle that transaction and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form
Entity concept Accountants regard a business as a separate entity, distinct from its owners or managers
Money measurement concept Accounts deal only with items to which a monetary value can be attributed
Accruals or accrued expenses Current liabilities, expenses which are charged against the profit for a particular period, even though they have not yet been paid for
Prepayments Payments which have been made in one accounting period, but should not be charged against profit under a later period, because they relate to that later period
Depreciation The measure of the cost or revalued amount of the economic benefits of the tangible non-current asset that have been consumer during the period
Net book value Cost less depreciation to date
Depreciable amount Total amount to be charged over the life or a non-current asset, usually its cost less any expected 'residual' sales or disposal value at the end of its life
Straight line method Means that total depreciable amount is charged in equal instalments to each accounting period over the expected useful life of the asset
Reducing balance method of depreciation Calculates the annual charge as a fixed percentage of the net book value of the asset, as at the end of the previous accounting period
The profit or loss on the disposal of a non-current asset The difference between net book value of the asset at the time of sale and net sale price (price minus any costs of making the sale); profit made when sales price > NBV
Non-current assets register Listing of all non-current assets owned by the organisation, broken down perhaps by department, location or asset type
Intangible asset An identifiable non-monetary asset without physical substance; must be controlled by entity as a result of events in the past and something from which the entity expects future economic benefits to slow
Research Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
Development Application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use
Amortisation Systematic allocation of the depreciation of the depreciable amount of an intangible asset over its useful life; amortisation period and method should be reviewed at each financial year end
Depreciable amount The cost of an asset or other amount substituted for cost, less its residual value
Useful life (a) the period over which an asset is expected to be available for use by an entity or (b) the number of production or similar units expected to be obtained from the asset by an entity
Carriage Refers to the cost of transporting purchased goods from the supplier to the purchaser; carriage inwards = purchaser pays, outwards = supplier
Net realisable value Sales value less any costs that will be incurred in making the sale
First in, first out (FIFO) Assumes that materials are issued out of the inventor in the order in which they were delivered into inventory, ie issues are priced at the cost of the earliest delivery remaining in inventory
Average cost Each component is assumed to have been purchased at the weighted average price of all components in the bin at that moment; issues are priced at this average cost
LIFO (last in, first out) Components issued to production formed part of the most recent delivery, inventories are the oldest receipts
Standard cost A pre-determined standard cost is applied to all inventory items; if this standard price differs from price actually paid during the period, the difference is written off as a 'variance' in the income statement
Replacement cost Assumed that the cost at which a inventory unit was purchased is the amount it would cost to replace it
Unpresented cheques Cheques set out which do not yet appear on the statement
Uncleared logements Cheques received and paid into the bank which do not yet appear on the statement
Discount Reduction in price of goods
Trade discount Reduction in the cost of goods resulting from the nature of the trading transaction; usually results from buying goods in bulk
Cash discount Reduction in the amount payable to the supplier in return from immediate payment rather than credit
Settlement discount Discount on the price of goods purchased for credit customers who pay their debts promptly, similar to cash discount
Output sales tax Sales tax charged on goods and services sold by a business
Input sales tax Sales tax paid on goods and services 'brought in' by a business
Error of transposition When a number of digits in an amount are accidentally recorded the wrong way round
Error of omission Means a failing to record a transaction at all, or making one entry but not the corresponding double entry
Error of principle Involves making a double entry in the belief that the transaction is being entered in the correct accounts, but subsequently finding out that the accounting entry breaks the 'rules' of an accounting principle or concept
Errors of commission Where the bookkeeper makes a mistake in recording transactions in the accounts
Compensating errors Errors which are, coincidentally, equal and opposite to each other
Suspense account Temporary account which is opened because either: (a) a trial balance does not balance or (b) the bookkeeper does not know where to post one side of a transaction
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