Accounting Chapter 4

Free Cash Flow

Operating Cash flow + Investing Cash Flow

Deposits Outstanding

are cash receipts of the company that have not been added to the bank's record of the company's balance.

Checks outstanding

are checks the company has written that have not been subtracted from the bank's record of the company's balance.

Control Activities

are the policies and procedures that help ensure that management's directives are being carried out.

Bank reconciliation

connects the company's cash balance to the bank's cash balance by identifying differences due to timing and errors.

Information and Communication

depend on the reliability of the accounting information system itself.

Detective Controls

designed to detect errors or fraud that already have occurred; Examples: Separation of duties, Physical controls, Proper authorization, Employee management

Preventive Controls

designed to keep errors or fraud from occurring in the first place. Examples: Reconciliations, Performance reviews

Timing

differences in cash occur when the company records transactions either before or after the bank records the same transaction.

Risk Assessment

identifies and analyzes internal and external risk factors that could prevent a company's objectives from being achieved.

Investing Activities

include cash investments in long-term assets and investment securities.

Financing activities

include transactions designed to raise cash or finance the business. There are two ways to do this: borrow cash from lenders or raise cash from stockholders.

Cash

includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers.

Monitoring

includes formal procedures for reporting control deficiencies.

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.

Operating activities

nclude cash transactions involving revenue and expense events during the period. In other words, operating activities include the cash effect of the same activities that are reported in the income statement.

Collusion

occurs when two or more people act in coordination to circumvent internal controls

Control Environment

sets the overall ethical tone of the company with respect to internal control. It includes formal policies related to management's philosophy, assignment of responsibilities, and organizational structure.

Cash equivalents

short-term investments that have a maturity date no longer than three months from the date of purchase.