Question

Which of the following statements is correct?

a) Cash budgets cannot be used to determine the firm's investing needs and scheduling transactions as well as its short-term borrowing.
b) All the answers are correct.
c) The cash balance and the unadjusted cash balance are always different even if the firm did not have any short-term borrowing during the month.
d) A cash budget can be obtained by the listing of a firm's anticipated cash inflows and outflows over a specified period.
e) The rule for a cash budget is that borrow enough to get to the maximum if unadjusted cash is greater than the minimum cash, otherwise do not borrow anything.

Answer 1

The correct statement regarding cash budgets is that they can be obtained by listing a firm's anticipated cash inflows and outflows, which helps in financial planning and liquidity management, including investing needs and potential short-term borrowing.

Step-by-step explanation:

The correct statement is d) A cash budget can be obtained by the listing of a firm's anticipated cash inflows and outflows over a specified period. This tool is used by firms to manage their short-term financial planning and liquidity. It identifies when cash shortages may occur and when there might be excess cash that could be invested. It also helps in determining the firm's investing needs and the timing of large expenditures, as well as any possible need for short-term borrowing.

The cash budget is a vital financial plan that helps firms make the right decisions regarding financing, whether that's choosing to issue stock, borrow from a bank, or issue bonds. Each of these options has its own set of advantages and disadvantages, such as the trade-off between maintaining operational control and having to meet scheduled interest payments.

Selecting the correct option in a cash budget is crucial because it influences how a firm manages its financial capital and maintains its cash flow to meet various obligations, like investing activities or repaying any short-term loans.