Question

Question two a) Define the term cash budget, examine its focus and the accounting principle which it disregards. b) Explain the importance of a cash budget. Penelope Jones has been trading as a producer of delicious preserves for several months. Her current account bank balance at 31"July 2019 is expected to be £8,200, but she anticipates capital expenditure in August 2019, which will reduce her bank balance substantially. Details of her budgeted data are shown below. June 2019 July 2019 August 2019 September 2019 Credit Sales 17,800 16,600 19,000 I Purchases Wages Expenses Capital expenditure 8,400 4,600 2,100 4,000 10,200 4,700 2,160 9,600 4,600 2,140 9,000 9,800 4,800 2,180 Anticipated timings for cash receipts and cash payments are as follows: • 60% of credit sales are received in the month after sale; the remaining 40% of credit sales are received two months after sale • Purchases are paid in the month after purchase • Wages are paid immediately • Expenses are paid in the following month, and include £400 per month of depreciation • Capital expenditure is paid in the same month as budgeted Required c) Prepare Penelope's cash budget for August 2019 and September 2019 in two separate columns. You should also show a totals column. Total 25 marks

Answer 1

A)

DEFINITION: A cash budget is an estimation of the cash flows for a business over a specific period of time. It helps organization to determine its ability to operate.

Cash budget mainly focuses on cash inflows and cash outflows during specific budget period. Cash budget is completely different from income and expenses statement. Cash budget primarily prepared for providing companies cash position at point of time.

B)

Importance of Cash Budget

The importance of cash budget may be summarised as follow:

1. Ease of Planning: By preparing Cash budget entity can know cash surplus or deficiency at selected point of time and enables the management to arrange for the deficiency before time and also plan for investing the surplus money in profitable investment according to liquidity requirements.

2. Forecasting the Future Cash requirements: Cash budget forecasts the future needs of funds, time and the amount well in advance. It, thus, helps planning for raising the funds before time at reasonable terms and costs.

3. Maintenance of minimum Cash Balance: Cash is the basis of liquidity of the enterprise. Cash budget helps in maintaining the liquidity. It suggests adequate cash balance for expected requirements and a fair margin for the contingencies.

4. Controlling Cash Expenditure: Cash budget acts as a controlling device. The expenses of various departments in the firm can best be controlled so as not to exceed the budgeted limit. As well as it also helps to determine the cash dividends.

5. Evaluation of Performance: Cash budget acts as a standard for evaluating the financial performance and ability to run operations.

C)

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