Accounting 131 Chapter 4

Cash Management Principles

-Earning the greatest return possible on excess cash -Speeding up collection from customers -Delaying payment of suppliers

Control Environment

-The foundation of the internal control system -The collection of environmental factors that influence the effectiveness of control procedures

Outstanding Checks

A check issued and recorded by the business that has not been "cashed" by the recipient of the check.

NSF Check

A check that has been returned to the depositor because funds in the issuer's account are not sufficient to pay the check (also called bounced check)

Credit Memos

A credit memo could result from if the bank collected a note receivable for the business and deposited the funds in the business's account. Credit memos recorded by the bank but not yet recorded by the business causes the bank balance to be larger than the cash account.

Debit Memos

A debit memo might result if the bank makes a prearranged deduction from the business's account to pay a utility bill. Debit memos recorded by the bank but not yet recorded by the business cause the bank balance to be smaller than the cash account balance

Petty Cash

A fund used to pay for small dollar amounts.

Cash over and short

An account the records the discrepancies between deposited amounts of actual cash received and the total of the cash register tape.

Deposit in Transit

An amount received and recorded by the business, but which has not been recorded by the bank in the time to appear on the current bank statement.

5 Components of Internal Control

Control Environment Risk Assessment Control Activities Information and Communication Monitoring

Business activity is best described as

Cyclical

Service Charges

Fees charged by the bank for checking account serives

Where is cash reported

On the balance sheet and the statement of cash flows

3 Areas of Internal Control System

Operating Objectives Reporting Objectives Compliance Objectives

Risk Assessment

Procedures that are designed to identify, analyze, and manage strategic risks and business process risks.

Operating Cycle

The elapsed time between the purchase of goods for resale and the collection of the cash from customers. -1st Step: Buying Inventory -2nd Step: Paying for Inventory -3rd Step: Selling Inventory

Accounting System

The methods and records used to identify, measure, record and communicate finical information about a business.

Internal Control System

The policies and procedures established by top management and the board of directors to provide reasonable assurance that the company's objectives are being met in 3 areas

Control Activities

The policies and procedures top management establishes to help insure that its objectives are met. Five Categories: -Clearly Defined Authority and Responsibility -Segregation of Duties -Adequate Documents and Records -Safeguards over Assets and Records -Checks on Recorded Amounts

Bank Reconcilation

The process of reconciling any differences between a company's accounting records and the bank's accoutning records.

Monitoring

The process of tracking potential and actual problems in the internal control system. Includes the internal audit function.