Chapter 9: Principles Of Cash Budgeting

Question 1

How do you calculate actual cash received from receivables?

Answer 1

Cash received = opening receivables + sales - closing receivables

Question 2

How do you calculate actual cash paid to payables?

Answer 2

Cash paid = opening payables + purchases - closing payables

Question 3

How do you calculate cash received on disposal?

Answer 3

Cash received = carrying value + gain on disposal - loss on disposal

Question 4

How do you calculate the actual cash paid for additions when part exchanging an asset?

Answer 4

Cash paid = change in the carrying value + depreciation

Question 5

What are some reasons for cash budgets?

Answer 5

• to show when can surpluses are likely to occur
• to show when large items can be paid
• to show where there is inadequate cash

Question 6

Define lagging

Answer 6

Lagging is the delay between when money is expected to be received or paid and when it actually happens

Question 7

List the four main sources of liquidity.

Answer 7

1. Cash in the bank
2. Short term investments
3. Cash inflows
4. Overdraft facility

Question 8

Define working capital and the formula for it.

Answer 8

Working capital is the amount of money a business has to cover its day-to-day expenses.

Working capital = Current assets - current
liabilities

Question 9

What is the calculation for the trade receivables collection period?

Answer 9

Collection period (days) = trade receivables/ revenue or credit sales x 365

Question 10

What is the calculation for the trade payables payment period?

Answer 10

Payment period (days) = (trade payables/credit purchases) x 365

Ideally we use credit purchases, but if not we can use cost of sales. It will, however, be less accurate

Question 11

What is the calculation for the inventory holding period?

Answer 11

Holding period (days) = inventories/cost of sales x 365

Question 12

How do you calculate the working capital cycle in days?

Answer 12

Inventory holding days + receivable collection period - payable payment period

Question 13

What are some reasons why a business may need to raise additional finance?

Answer 13

• to fund working capital
• to reduce payables
• to purchases non-current assets

Question 14

What are the advantages and disadvantages of using cash to fund non-current assets?

Answer 14

Advantages
• full ownership from the outset
• no interest

Disadvantages
• large sums of cash tied up in the NCA
• lose interest earning potential if it’s not in the bank

Question 15

What are the advantages and disadvantages of using part-exchange to fund non-current assets?

Answer 15

Advantages
• easy way of getting rid of an old machine

Disadvantages
• potentially not getting full market price
• cash is still needed

Question 16

What are the advantages and disadvantages of using a bank loan to fund non-current assets?

Answer 16

Advantages
• repayment terms are flexible
• interest rates may be fixed or variable
• variety of methods of repaying

Disadvantages
• security may be required, if repayments are missed the asset could be repossessed

Question 17

What are the advantages and disadvantages of using hire purchase to fund non-current assets?

Answer 17

Advantages
• can be set up quickly
• flexible repayment terms

Disadvantages
• assets are repossessed if payments aren’t completed
• total payment often far outweighs the cash purchase price

Question 18

What are five ways to improve cash flow?

Answer 18

1. Improve credit control
2. Delay payments to suppliers
3. Offer prompt payment discounts
4. Dispose of non-current assets
5. Reduce inventory

Question 19

What are the three things that should be considered when choosing the right form of finance?

Answer 19

1. Cost
2. Timescale
3. Security