Question

1. Which of the following statements is not a purpose for a cash budget?

A. A cash budget indicates when the firm will be profitable.

B. A cash budget indicates when and how much financing the firm will need.

C. A cash budget can be compared with actual results to shape corrective actions.

D. A cash budget can be a method of evaluating an employee’s performance.

2. Which of the following is not an accurate trade-off relevant to working capital management?

A. A firm makes large investments in cash and marketable securities, which reduces its overall rate of return but protects the firm from risk.

B. Firms with few current assets are more liquid than those with more.

C. Reducing the risk of illiquidity may decrease profitability.

D. Short-term debt is repaid or rolled over more often, which may place an undue burden on the firm at a bad time of the year, and its interest rates are less predictable; by contrast, long-term debt is more predictable, less risky, and less profitable.

Answer 1

1) Option D is correct option as it is not a purpose for a cash budget to evaluate an employee’s performance. Remaining other option are correct. There are various factors other than cash budgeting to evaluate an employee's performance. Cash budgeting purpose is to furnish the status of cash in flow and cash out flow of the company.

2) Option B is correct option because fewer current assets will reduce the liquidity instead of increase in liquidity. The more current assets thus will have more liquidity and less current assets thus have less liquidity to repay the current liability.