Accounting 201Chapter 04 Power Point Flashcards
What will you learn in Accounting Chapter 4?
Cash and Internal Controls
Discuss the Impact of Accounting Scandalsand the Passage of the Sarbanes-Oxley Act.
- Managers are entrusted with the resources ofboth the company’s lenders (liabilities) andowners (stockholders’ equity).- Managers of the company act as stewards orcaretakers of the company’s assets.- In recent years some managers have shirkedtheir et
What is Sarbanes-Oxley Act of 2002
Congress passed the Sarbanes-Oxley Act, alsoknown as the Public Company AccountingReform and Investor Protection Act of 2002 andcommonly referred to as SOX.
Identify the Components, Responsibilities,and Limitations of Internal Control. From a financial accounting perspective,internal control is a company’s plan to?
Safeguard the company’s assets.- Improve the accuracy and reliability ofaccounting information- Effective internal control builds a wall to preventmisuse of company funds by employees andfraudulent or errant financial reporting
Define Cash and Cash Equivalents
Cash - includes currency, coins, and balances insavings and checking accounts, as well asitems acceptable for deposit in these accounts, such as checks received from customers.Cash equivalents - short-term investments that have a maturity date no longer than three months from the date of purchase.
Understand Controls over Cash Receiptsand Cash Disbursements.
Cash Controls - management must safeguard all assets against possible misuse. Again, because cash is especially susceptible to theft, internal control of cash is a key issue.Cash Receipts - most businesses receive payment from the sale of products and services either in the form of cash or as a check received immediately or through the mail.
Reconcile a Bank Statement
- A bank ________________ matches the balance of cash in the bank account with the balance of cash in the company’s own records.- A company’s cash balance as recorded in itsbooks rarely equals the cash balance reported inthe bank statement.- Differences in these balances occur because ofeither timing differences or errors.- It is the possibility of these errors, or even outrightfraudulent activities, that make the bankreconciliation a useful cash control tool.
Account for Petty Cash
Companies like to keep a small amount of cash on hand at the company’s location for minor purchases such as postage, office supplies, delivery charges, and entertainment expense- to pay for these minor purchases, Companies keep some minor amount of cash on hand in a petty cash fund.- Management writes a check for cash against the company’s checking account and puts that amount of withdrawn cash in the hands of an employee who becomes responsible for it. This employee is often referred to as the petty-cash custodian.
Identify the Major Inflows andOutflows of Cash.
Companies report cash in two ways.- First, it is reported as an asset in the balancesheet under current assets and represents cashavailable for spending at the end of the reportingperiod. It provides only the final balance for cash.- Secondly, reports information about cash receiptsand payments during the period in a statement ofcash flows.- From the statement of cash flows, investors knowa company’s cash inflows and cash outflowsrelated operating, investing and financingactivities.
Assess earnings quality by comparing net income and cash flows.
__________ ________ is the ability of current net income to help us predict the future performance of a company.- When net income does not provide a good indicator of future performance, the lower its earnings quality is said to be.- Comparing the trend in a company’s reported net income to its trend in free cash flow, also provides earnings quality of a company.- Companies whose free cash flow is declining relative to the trend in net income are likely to have lower-quality earnings.
