CASH BUDGET
Q1. What is a plan that shows the expected cash inflows and cash outflows during the budget period,
including receipts from loans needed to maintain a minimum cash balance and repayments of such loans
called?
a. Cash budget b. balance sheet
c. income statement d. operating budget
Q2. Which of the following statement is true ?
a. It is especially important to maintain a cash balance necessary to meet ongoing obligations.
b. Cash management is therefore concerned with optimising the amount of cash available to the
company and maximising the interest on any spare funds not required immediately by the company.
Q3. Cash budgets are vital to the management of cash. Tick the correct statement (s)
a. They held to show cash surplus and cash shortages
b. They show profit and loss
Q4. Cash budgets is based on:
a. Sales forecast b. expenses forecast c. capital expenditure budgets d. all of the above
Q5. Cash budget is summary of:
a. Expected cash receipts and cash payments b. estimated expenses and income
c. estimated purchases and sales d. all of the above
Q6. Cash budget does not include:
a. Non cash transaction b. credit sales to debtors c. outstanding expenses d. all
Q7. Which of the following are objectives of cash budgeting?
(1) To anticipate cash shortages and surpluses
(2) To enable necessary funds to be made available
(3) To monitor trade receivables
A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3
Q8. All sales of a company are on credit. Budgets for a period include:
Sales $724,000 Opening trade receivables $206,900 Closing trade receivables $241,600
$4,360 of the opening trade receivables are budgeted to be written off as bad debts during the period.
What are the budgeted cash receipts from sales in the period?
A $684,940 B $689,300 C $754,340 D $758,700
Q9. Which of the following would appear as an item in a cash budget?
(1) Depreciation of a non-current asset
(2) Loss on sale of a non-current asset
(3) Payment for the purchase of a non-current asset
A 3 only B 1 and 2 only C 2 and 3 only D 1, 2 and 3
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What is Cash?
In accounting, cash refers to cash and cash equivalents. Cash equivalents are assets that can be converted to
currency quickly, with insignificant risk to changes in value.
For accounting purposes, cash includes:
Physical cash (banknotes and coins)
Bank current account balances
Investments readily convertible into cash (such as money market instruments).
Why should we hold cash?
- precautionary motive - speculation (investment) motive - transaction motive
Working Capital
Working capital (trading assets) is the current assets needed for a business to sustain operations.
It consists of the following:
Inventory (finished goods, work-in-progress, and raw materials)
Trade receivables (sums owing from customers for credit sales)
Trade payables (sums owed to suppliers for credit purchases)
The level of working capital maintained by a company is calculated as follows:
Working capital $ = Inventory $ + Trade receivables $ - Trade Payables $
The longer the cycle, the longer it takes for a business to get a return from its working capital. This would
have an impact on the cash flow of a business.
Negative working capital cycle: If the working capital cycle is negative, the business is receiving cash
from customers before it needs to pay its trade suppliers.
A business which does not give credit to its customers, such as a supermarket chain, can have a negative
working capital cycle.
Positive working capital cycle: This is the more common working capital cycle. The gap between
paying suppliers and receiving cash from customers represents a financing need.
This must be funded from a short-term source, such as a bank overdraft, or a long-term source, such as a
long-term loan or equity.
It is unlikely that an organisation can choose whether to have a positive or negative working capital cycle.
Organisations within the same industry will likely have the same operating cycle.
Organisations may try to influence their working capital cycle by managing suppliers, manufacturing
processes, and credit sales policies.
LIQUIDITY
An asset described as being liquid means it is easily convertible to cash.
For example, the illustration below shows the relative liquidity of some asset classes:
Buildings take a while to sell and generate cash, so they are not considered liquid.
The above financing methods will provide cash to sustain liquidity. They come with different costs and
implications for the organisations (i.e. bankruptcy risk).
Organisations will plan and monitor their cash flows to ensure they have enough liquidity.
MANAGING WORKING CAPITAL CYCLE
