14.5 Cash Disbursements and the Cash Budget Flashcards
Which one of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for calendar Year 1?
A. A purchase order issued in December Year 1 for items to be delivered in February Year 2.
B. Dividends declared in November Year 1 to be paid in January Year 2 to shareholders of record as of December Year 1.
C. The amount of uncollectible customer accounts for Year 1.
D. The borrowing of funds from a bank on a note payable taken out in June Year 1 with an agreement to pay the principal and interest in June Year 2.
D. The borrowing of funds from a bank on a note payable taken out in June Year 1 with an agreement to pay the principal and interest in June Year 2.
The cash budget is used to plan all of the following except
A. The firm’s dividend policy
B. Outside financing activity
C. The cash collection schedule
D. The investing of excess cash
C. The cash collection schedule
The cash budget combines the results of the operating budget with the cash collection and disbursement schedules to produce a comprehensive view of the sources and uses of cash. As such, the collection schedule is used to prepare the cash budget, but the cash budget is not used to plan the cash collection schedule.
The cash budget must be prepared before completing the
A. Forecasted balance sheet
B. Production budget
C. Capital expenditure budget
D. Sales budget
A. Forecasted balance sheet
Which one of the following best represents a factor that should be considered for medium- and long-term cash forecasting?
A. Current monthly depreciation
B. Non-routine property sales
C. Pre-tax cost of capital projects
D. Impact of stock split
B. Non-routine property sales
Non-routine property sales could result in large fluctuations of cash and should be considered for medium- and long-term forecasting.
A firm develops an annual cash budget in order to
A. Determine the opportunity cost of alternative sales and production strategies
B. Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing
C. Support the preparation of its cash flow statement for the annual report
D. Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be deferred.
B. Avoid the opportunity cost of noninvested excess cash and minimize the cost of interim financing
The cash budget is perhaps the most important part of a company’s budget program. A cash budget facilitates planning for loans and other financing. Additionally, a firm should plan how to invest temporary surpluses of cash.
A company has a beginning cash balance of $10,000 and expects $40,000 in cash receipts for each of the next 2 months. Typically, disbursements total about $20,000 per month. The company’s payables policy has been to pay the bills upon receipt to maintain good vendor relationships and take advantage of any discounts. In month 1, the company also expects a one-time $40,000 bill for a patent application. Based on this information, select the statement below that reflects the most appropriate action that the company should take relative to the company’s cash position during the 2-month period.
A. The company should finance the $40,000 payment over a longer term, but with a higher interest rate.
B. No action is necessary as the company will have sufficient cash during the 2-month period.
C. The company should defer disbursements to maintain a desired level of cash
D. The company should arrange a short-term line of credit large enough to cover the projected $10,000 shortfall during the first month.
D. The company should arrange a short-term line of credit large enough to cover the projected $10,000 shortfall during the first month.
Taking a short-term line of credit enough only to cover the projected $10,000 shortfall during the first month would cover the shortage while minimizing financing costs.
A company uses a calendar year and prepares a cash budget for each month of the year. Which one of the following items should be considered when developing July’s cash budget?
A. Federal income tax and Social Security tax withheld from employees’ June paychecks to be remitted to the Internal Revenue Service in July.
B. Property taxes levied in the last calendar year scheduled to be paid quarterly in the coming year during the last month of each calendar quarter.
C. Quarterly cash dividends scheduled to be declared on July 15 and paid on August 6 to shareholders of record as of July 25.
D. Recognition that 0.5% of the July sales on account will be uncollectible.
A. Federal income tax and Social Security tax withheld from employees’ June paychecks to be remitted to the Internal Revenue Service in July.
Withholding amounts that must be forwarded to the federal government represent cash collections that must be disbursed. They would therefore be included in the cash budget for the month of disbursement.
Calculate cash paid to suppliers
Inventory
Jan 1: $6,000,000
Dec 31: $7,500,000
Accounts Payable
Jan 1: $4,000,000
Dec 31: $5,000,000
Expected purchases: $55,000,000
$54,000,000
Purchases - increase in AP
As part of the master budget process, a merchandising company begins to prepare the cash budget for the same period. Which of the following additional information will be most useful to management in preparing this budget?
A. Sales credit policies, purchasing terms, and planned capital acquisition
B. Projected revenues, projected expenses, and intended financial activities
C. Credit policies, projected expenses, and inventory procurement policies.
D. Planned direct material purchases, planned direct labor, and purchasing terms.
A. Sales credit policies, purchasing terms, and planned capital acquisition
A corporation’s current year-end sales totaled $240 million, and its ending cash balance was $20 million. The corporation anticipates its sales for the upcoming year will be $260 million. On average, 10% of a year’s sales will be collected during the following year. Assume the corporation has no uncollectible accounts.
The corporation also anticipates cash expenses of $240 million and depreciation of $5 million. During the next year, the corporation intends to spend $30 million cash for capital improvements.
If the corporation’s policy is to have a minimum of $10 million cash available at the beginning of each year, its budgeted cash flow projections indicate that it will need outside financing of
A. $0
B. $2 million
C. $7 million
D. $26 million
B. $2 million
Beginning cash: $20 million
Budgeted collection: 258 million
Budgeted disbursement: 270 million
Projected ending cash: 8 million
Ending cash should be: 10 million
Financing needed: 2 million
Which one of the following is in a company’s cash budget?
A. Depreciation of plant equipment
B. Amortization of patent costs
C. Conversion of debt for equity
D. Disposal of land
D. Disposal of land
If we sell land, we will get proceeds, or might have to pay to dispose.
A company has budgeted its operations for August. No change in the inventory level during the month is planned. Selected data based on estimated amounts are as follows:
- Net loss: $(120,000)
- Increase in accounts payable: 48,000
- Depreciation expense: 42,000
- Decrease in gross amounts of trade account receivables: 72,000
- Purchase of equipment on 90-day credit terms: 18,000
- Provision for estimated warranty liability: 12,000
What is the expected change in the cash position during August?
A. $54,000 increase
B. $30,000 decrease
C. $36,000 increase
D. $18,000 decrease
A. $54,000 increase
The net change in expected cash receipts and disbursement is determined by adjusting the net loss. The purchase of equipment on credit does not affect cash or the net loss. Depreciation expense and the accrual of an estimated warranty liability are noncash expenses that are added back to the net loss. The net loss should also be adjusted for the difference between cost of sales and cash paid to suppliers.
Given that inventory is not expected to change, cost of sales exceeds the cash to be paid to suppliers by the amount of the increase in accounts payable. The increase must be added back to the net loss. A decrease in accounts receivable means that cash collections exceeded sales.
Accordingly, this decrease is also added back to the net loss. The expected increase in cash position is $54,000
-120,000 net loss + 42,000 depreciation + 12,000 warranty liability + 48,000 increase in accounts payable + 72,000 decrease in accounts receivable.
