Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 15, Problem 4Q
Summary Introduction
To explain: The cash budget and its use in reduction of cash and in negotiating a loan and advantage and disadvantage of daily cash budgets over monthly cash budget.
Introduction:
Cash:
Cash is always reported under the head of current assets in the balance sheet of a company. It is treated as current asset because any asset which can be report in the form of cash within a period of 1 financial year is classified as current asset and cash is already presented in the form of cash.
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What is a cash budget, and how can this statement be used to help reduce the amount ofcash that a firm needs to carry? What are the advantages and disadvantages of daily overmonthly cash budgets, and how might a cash budget be used when a firm is negotiating aloan from its bank?
A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has excess cash on hand? Explain.
Which of the following statements is NOT CORRECT?
a. The cash budget is useful for estimating potential funding needs, especially for short-term working capital loans.
b. Working capital management is critical because it affects financing decisions and the firm's profitability.
c. Credit policy affects working capital because it impacts both sales and the time it takes for receivables to be obtained.
d. If a company needs to increase its cash flow from operations in the next month or two, it can change its credit policy from 2/10 net 30 to net 60.
e. f a company is unsure about the volume of sales, profits, and cash flows for the coming year, it will retain a relatively large amount of cash and marketable securities.
Chapter 15 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Ch. 15 - What are some pros and cons of holding high levels...Ch. 15 - Prob. 2QCh. 15 - What are the two definitions of cash, and why do...Ch. 15 - Prob. 4QCh. 15 - What are the four key factors in a firms credit...Ch. 15 - Prob. 6QCh. 15 - Why is some trade credit called free while other...Ch. 15 - Define each of the following loan terms, and...Ch. 15 - Prob. 9QCh. 15 - Indicate using a (+), (), or (0) whether each of...
Ch. 15 - CASH CONVERSION CYCLE Parramore Corp has 12...Ch. 15 - Prob. 2PCh. 15 - COST OF TRADE CREDIT AND BANK LOAM Lancaster...Ch. 15 - CASH CONVERSION CYCLE Zane Corporation has an...Ch. 15 - RECEIVABLES INVESTMENT McEwan Industries sells on...Ch. 15 - WORKING CAPITAL INVESTMENT Pasha Corporation...Ch. 15 - CASH CONVERSION CYCLE Chastain Corporation is...Ch. 15 - CURRENT ASSETS INVESTMENT POLICY Rentz Corporation...Ch. 15 - Prob. 9PCh. 15 - CASH BUDGETING Helen Bowers, owner of Helens...Ch. 15 - CASH BUDGETING Rework problem 15-10 using a...Ch. 15 - Prob. 12IC
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- In an attempt to better understand RR’s cash position, Johnson developed a cash budget for the first 2 months of the year. She has the figures for the other months, but they are not shown. After looking at the cash budget, answer the following questions: What does the cash budget show regarding the target cash level? Should depreciation expense be explicitly included in the cash budget? Why or why not? What are some other potential cash inflows besides collections? How can interest earned or paid on short-term securities or loans be incorporated in the cash budget? In her preliminary cash budget, Johnson has assumed that all sales are collected and thus that RR has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense? (Hint: Bad debts will affect collections but not purchases.)arrow_forwardWe discuss how to prepare the cash budget and understand therelationships among the operating budgets, cash budget, andbudgeted balance sheet. The cash budget helps managersdetermine whether they need to borrow money to fund operations,or whether they can make repayments toward their borrowings orinvest excess cash to earn interest. The cash budget and thebudgeted balance sheet are forward-looking versions of thestatement of cash flows and the balance sheet. Soup Inc. has the following budgeted sales: January $60,000, February$80,000, and March $90,000. 40% of the sales are for cash and 60% are oncredit. For the credit sales, 75% are collected in the month of sale, and 25% thenext month. The total budgeted cash receipts for March are:arrow_forwardHow would a shift from a tight credit policy to a relaxed policy belikely to affect a firm’s cash budget?arrow_forward
- which one is correct please confirm? QUESTION 14 When preparing a cash budget, once a firm has estimated its cash receipts the firm must ____________. a. determine the desired cash balance b. pay dividends to its stockholders c. plan a pro forma statement d. schedule disbursementsarrow_forwardwhich one is correct please confirm? QUESTION 16 When preparing a cash budget, once a firm has estimated its cash receipts the firm must ____________. a. pay dividends to its stockholders b. determine the desired cash balance c. plan a pro forma statement d. schedule disbursementsarrow_forwardAnswer this question İn some organizations (firms, universities, government agencies), spending appears to increase as the end of the budgeting period approaches, even if there are no seasonal differences. What might cause this? (A). "Our cash budget shows a surplus for the quarter, so we do not have to think about arranging any bank financing." Comment on this statement. (B). Accrual accounting is preferable to cash flow accounting because the information is more relevant to all users of financial statements. Discuss and answer the questionarrow_forward
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