Cash Budgeting and Cash Flow Management

Study Notes

Cash Budget

Cash receipts come from customers, and other sources like investments, sales of assets, and borrowings should be considered
Cash disbursements require adjustments and additions for accruals, extraneous items, and financial policy requirements
A minimum cash balance must be maintained, and the cash budget must be altered to accommodate bank loans and their repayment

Budgeted Income Statement and Statement of Financial Position

Budgeted income statement shows the expected net income during the budget period
Budgeted statement of financial position is developed by adjusting the current statement for data from other budgets

Budgeting in Service Industries

Service organizations achieve their budgeted goals by providing services
The chief executive officer approves the budget and submits it to the board of directors

Master Budget

A master budget is a comprehensive budget for a specific period, consisting of interrelated operating and financial budgets
The major steps in developing a master budget include:
- Establishing basic goals and long-range plans
- Preparing a sales forecast and estimating costs and operating expenses
- Determining the effect of budgeted operating results on assets, liabilities, and ownership equity accounts
- Summarizing estimated data in a projected income statement and cash flow statement

Budgeting and its Role

Budgeting is the act of preparing a budget
Budgetary control is the use of budgets to control a firm's activities
Budget plays an important role in:
- Allocating resources
- Coordinating operations
- Identifying constraints and limitations
- Communicating expected actions and results
- Authorizing activities
- Motivating and guiding implementation
- Providing controls of operations
- Managing cash flows
- Serving as criteria in performance evaluation
Budget preparation allows managers to:
- Be forward-looking in evaluating upcoming events and situations
- Identify potential problems and minimize their adverse effects
- Identify current and potential bottlenecks in operations
- Coordinate operations among all budgeted units and synchronize department activities

Description

This quiz covers the importance of cash budgeting in a firm, including cash receipts from customers and other sources, as well as cash disbursements and accruals. It also touches on the necessity of considering extraneous items in the budgeting process. Test your understanding of cash flow management and budgeting principles.