Question

Firms need to forecast their cash flow. The primary tool used is the ________, which is a table that shows cash receipts, disbursements, and balances over some time period. Firms typically develop a monthly budget for annual planning and a daily budget gives a more precise picture of the actual cash flows, which is good for scheduling actual payments on a day-by-day basis.

Fill-in options: Income Statement/ Cash Budget/ Aging Schedule

The monthly cash budget begins with a(n) _______ forecast for each month and a projection of when actual collections will occur. Then there is a forecast of materials purchases, followed by forecasted payments for materials, labor, leases, new equipment, taxes and other expenses. The forecasted payments are then subtracted from the forecasted collections to obtain the expected net cash gain or loss for each month. This gain or loss is added to or subtracted from the beginning cash balance, and the result is the amount of cash the firm would have on hand at the end of the month if it didn't borrow or invest.

Fill-in Options: Earnings/ Sales/ Cash

Give the correct response to the following question.

Which of the following items would not be included in the cash budget?

__________

Fill-in Options: Bad Debt Expense/ Interest Expense on loans/ Tax Payments/ Depreciation Expense/ Payments for materials

Answer 1

The primary tool used is the cash budget, which is a table that shows....

• Income statement is a statement of accrued incomes and expenditures, and not a tool to forecast cash flows
• aging schedule is a tool to estimate receivables and working capital

The monthly cash budget begins with a sales forecast for each month........

• The cash budget starts with sales, and deducts/adds the relevant cash outflows/inflows to estimate the net cash flow

Depreciation Expense would not be included in the cash budget.  

• depreciation is a non-cash expense, and would therefore not be included in the cash budget. All the other items listed impact the cash flow as they involve real cash flows