Chapter 4

Question 1

Purposes of a cash budget

Answer 1

Allows managers to know that they whether they have sufficient funds to carry out their future plans

Question 2

Format of a cash budget

Answer 2

1. Analysis of receipts
2. Analysis of payments
3. Net cash flow
4. Bank balance brought forward
5. Bank balance carried forward

Question 3

Reasons for having prompt payment discounts

Answer 3

1. Can reduce bad debts (customers will pay discounted invoices first)
2. Improves liquidity by improving working capital cycle
3. Prompt payment discounts’ losses may be cheaper than other finance costs (interest)
4. It can improve the competitiveness of the business