Lesson 21 - Cash Budget

Question 1

A cash budget is…

Answer 1

An accounting report which predicts future cash receipts and payments, determines the expected cash surplus or deficit, and thus estimates the bank balance at the end of the budget period.

Question 2

The structure for the Cash Budget is made up of…

Answer 2

Budgeted cash receipts
Budgeted cash payments
Budgeted cash surplus/deficit
Add Bank Balance at Start
Budgeted Bank Balance at End

Note: The structure is identical to the Statement of Receipts and Payments, just with the word “Budgeted” at the start.

Question 3

How can cash budgets be used as a decision making tool?

Answer 3

Cash budgets serve as a valuable decision-making tool. They help you make informed financial decisions, such as when to make major purchases, hire employees, or negotiate better payment terms with suppliers. By monitoring your cash budget regularly, you can adapt your financial strategies to achieve your goals more effectively.

Question 4

How does a cash budget help a business to plan for a surplus or deficit?

Answer 4

One of the primary goals of a cash budget is to identify potential cash deficits (when payments exceed receipts) or cash surpluses (when receipts exceed expenses). This allows you to plan for these situations, such as arranging for financing during shortages or investing surplus funds wisely.

Question 5

What is the purpose of a cash budget?

Answer 5

A cash budget is a financial tool used by businesses and individuals to plan and manage their cash flows. It helps the business to estimate how much money they’ll receive and spend over a specific period, typically on a monthly or quarterly basis.

Question 6

True or False: Cash budgets only consider cash transactions, excluding non-cash items like Accounts Receivable.

Answer 6

True. Cash budgets focus solely on actual cash movements.

Question 7

True or False: The primary purpose of a cash budget is to calculate net profit.

Answer 7

False. The primary purpose of a cash budget is to forecast and manage cash flows, not to calculate net profit, which is the focus of an income statement.

Question 8

True or False: Cash budgets are typically prepared for very short time periods, like a day or a week.

Answer 8

False. Cash budgets are typically prepared for longer time periods, such as a month or a quarter.

Question 9

True or False: A cash budget helps identify potential cash deficits but not surpluses.

Answer 9

False. A cash budget helps identify both potential cash deficits and surpluses.

Question 10

True or False: If a company’s cash budget shows a surplus, it should consider reinvesting the excess cash back into the business to expand and generate more sales in the future.

Answer 10

True.

Question 11

True or False: A cash budget does not take into account accounts payable, only accounts receivable.

Answer 11

False. A cash budget considers neither accounts receivable (money expected to be received) and accounts payable (money expected to be paid).

Question 12

True or False: A cash budget is a historical document that records past cash flows.

Answer 12

False. A cash budget is a forward-looking report that predicts future cash flows based on projections and estimates.