Question

About a company's cash budget, whats the correct answer:

A) the minimum cash balance has to equal the ending cash balance

B) Quarters 2 beggining cash balance is the end of the quarters 1 cumulative cash surplus

C) ending cash balance + minimum cash balance is = to the cash surplus shown on a cash budget

D) firms try to keep a zero cash balance at all times

E) a cash deficiency indicates a need for at least a short term borrowing

Answer 1

About a company's cash budget, the correct answer is -

E) a cash deficiency indicates a need for at least a short term borrowing.

Explanation -

A cash budget of an organisation simply wants to keep track of usgae of cash in the company. The base budget is the sales budget which is prepared first to know the target sales and accordingly production budget is then prepared. A cash budget is prepared to know if there is surplus cash available for operations or there is going to be deficit of cash. An organisation will not be okay with varying cash limits. It does want too much liquidity also it cannot do with shortage of cash in a company and hence an organisation aims for a specific closing cash balance of cash. Anything above that is surplus of cash. After all inflows and outflows of cash, if there is a deficit of cash that means it can hamper in working capital process.

We draw a cash budget to know that if there is a deficit then we have to borrow short term debt to fulfill that deficit.

If a company has shortage of cash on a certain date, it needs to borrow short term debt to continue with operations. If a company has surplus of cash on a date that is sitting idle then it needs to invest it somewhere and earn interest on it. This is the principle of cash budget.

All other statements are not true.

A) The minimum cash balance is what is decided to be maintained by company as per its norms. Ending cash balance is the cash balance when all inflows are added to opening balance and all outflows are subtracted.

B) Quarters 2 beginning cash balance is the ending cash balance of Quarter 1.

C) It is false. Surplus is over and above ending cash balance. It is the cash which has no use as of now.

D) A firm does not try to keep zero cash balance all the time as it has to maintain a healthy current ratio and ensure there is enough liquidity in the firm in times of emergency payments. Firms maintain a healthy pre-decided cash balance and rest of surplus in invested.