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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

What is a cash budget, and how can this statement be used to help reduce the amount of cash that 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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