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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry? What are the advantages and disadvantages of daily over monthly cash budgets, and how might a cash budget be used when a firm is negotiating a loan from its bank?

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.

Explanation

Cash Budget:

It is that tool, which indicates the amount of available cash is appropriate or not for the operational activities of the business. It also indicates the cash flows for a specific period.

Use in reduction of cash:

  • If there is any surplus of cash (over requirement for operations) is available with the company, then it will be indicated by the cash budget.
  • So, the company can utilize that excess amount of cash for other activities.

Daily cash budgets over monthly basis:

Advantage:

The cash budget prepared on daily basis provides clear and actual status of cash flows of the company...

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