Acct 230 1st Edition Lecture 15Outline of Last Lecture I. Casha. Cash & Cash equivalentsb. Controls over Cash Receipts and Cash DisbursementsOutline of Current Lecture II. Casha. Accounts for Petty Cashb. Major Inflows and Outflows of Cashc. Earnings quality by comparing net income and cash flowsCurrent LectureIII. Casha. Account for Petty Cashi. 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 expenseii. To pay for these minor purchases, companies keep some minor amount of cash on hand in a petty cash fund.iii. Management writes a check for cash against the company’s checking account and puts that amount of withdrawn cash in the hands of an employee who becomes responsible for it.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.iv. Accounting for the petty cash fund involves recording transactionsv. Establish the fund,vi. Recognize expenditures from the fund,vii. Replenish the fund as the cash balance becomes sufficiently low.viii. At any given time, the cash remaining in the fund plus all receipts should equal the amount of the fund.ix. Suppose that at the beginning of May, Starlight Drive-In establishes a petty cash fund of $500 to pay for minor purchases. The entry to establish the fund is:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.b. Major Inflows and Outflows of Cashi. Companies report cash in two ways. 1. First, it is reported as an asset in the balance sheet under current assets and represents cash available for spending at the end of the reporting period. It provides only the final balance for cash. 2. Secondly, reports information about cash receipts and payments during the period in a statement of cash flows.ii. From the statement of cash flows, investors know a company’s cash inflows and cash outflows related operating, investing and financing activities.iii. Activities on Cash Flow Statement:1. Operating activities include cash transactions involving revenue and expense events during the period. 2. Investing activities include cash investments in long-term assets and investment securities. 3. Financing activities include transactions designed to raise cash or finance the business. There are two ways to do this: borrowcash from lenders or raise cash from stockholders. c. Earnings quality by comparing net income and cash flowsi. Earnings quality is the ability of current net income to help us predict the future performance of a company. 1. When net income does not provide a good indicator of future performance, the lower its earnings quality is said to be.2. Comparing the trend in a company’s reported net income to its trend in free cash flow, also provides earnings quality of a company.3. Companies whose free cash flow is declining relative to the trend in net income are likely to have lower-quality earnings.ii. The difference between revenues and expenses—net income—provides an accrual-basis measure of the company’s ability to create wealth for its stockholders. In general, the greater a company’s net income, the greater will be the value of the company to stockholders. However, the timing of revenues and expenses recorded under accrual-basis accounting may differ from the timing of operating cash flows. iii. A simple way to calculate a company’s free cash flows is its operating cash flows plus investing cash flows during the period. This measurerepresents the cash that is free to distribute to stockholders and repaydebt.iv. Companies whose free cash flows are declining relative to the trend innet income are likely to have lower-quality