Question 1

A small business whose sales are highly variable,such as a seasonal business,should use a short cash planning horizon.

Accepted Answer

A short cash planning horizon allows for better flexibility and adaptability to changes in sales and expenses during peak and off-peak seasons. This can help the business to avoid cash flow problems and make more informed financial decisions.

Question 2

In a cash budget,credit sales to customers are recorded at the time the sale is made.

Accepted Answer

In a cash budget, only cash inflows and outflows are recorded. Credit sales are not considered until the payment is received, and therefore, are not recorded at the time of sale.

Question 3

Compiling the total cash on hand,bank balance,summary of the day's sales,summary of the day's cash receipts,and a summary of accounts receivables collections into monthly summaries provides the basis for making reliable cash forecasts.

Accepted Answer

Compiling these financial data into monthly summaries allows for a more accurate analysis of cash flow trends and can assist in predicting future cash balances.

Question 4

The goal of cash management is to maintain as much cash as possible on hand to meet any unexpected circumstances that might arise.

Accepted Answer

The answer of The goal of cash management is to...

Question 5

The most reliable method of determining an adequate minimum cash balance is using estimates of similar businesses from trade literature.

Accepted Answer

The most reliable method of determining an adequate minimum cash balance is by analyzing the specific financial situation of the business, taking into account factors such as cash inflows and outflows, seasonal trends, and potential emergencies. Relying solely on estimates from trade literature may not accurately reflect the unique financial needs of the business.

Question 6

The first step in preparing a cash budget is to forecast sales.

Accepted Answer

The answer of The first step in preparing a cash...

Question 7

Developing a cash forecast is essential for new businesses because early profit levels usually do not generate sufficient cash to keep the company afloat.

Accepted Answer

Developing a cash forecast helps new businesses plan for and manage their cash flow, which is essential because profits may not be sufficient in the early stages of the business. A cash forecast can help businesses identify potential cash shortfalls and take steps to address them before they become a problem.

Question 8

A highly profitable company rarely experiences cash flow problems.

Accepted Answer

While a highly profitable company may have a lot of revenue, it does not necessarily mean they have positive cash flow. Cash flow is affected by factors such as accounts receivable, inventory, and payment terms, and can be negative even for profitable companies if they are not managing these factors effectively.

Question 9

A small company's ideal minimum cash balance is one month's sales.

Accepted Answer

There is no one-size-fits-all answer to what an ideal minimum cash balance should be for a small company. It depends on factors such as the company's size, industry, and cash flow patterns. A common rule of thumb is to maintain at least three months' worth of expenses in cash reserves, but this can vary greatly depending on the specific circumstances of the company.

Question 10

Because the heart of the cash budget is the sales forecast,the cash budget is only as accurate as the sales forecast on which it is based.

Accepted Answer

This statement is true because the sales forecast is the main driver of cash inflows in the cash budget. If the sales forecast is inaccurate or unreliable, then the cash budget will also be inaccurate and unreliable. Therefore, it is important to ensure that the sales forecast is as accurate as possible in order to create a reliable cash budget.

Question 11

A cash budget allows a small business owner to anticipate cash shortages and cash surpluses and gives him time to handle,or even avoid,approaching problems.

Accepted Answer

A cash budget helps small business owners to forecast their future cash flows and identify potential issues in advance. This allows them to adjust their spending and investment decisions to avoid cash shortages and take advantage of cash surpluses. By using a cash budget, business owners can better manage their resources and maintain sufficient cash reserves to cover their expenses and liabilities.

Question 12

Typically,small business owners should prepare a projected weekly cash budget for at least six months and quarterly estimates for the remainder of the year,being careful to cover all seasonal sales fluctuations.

Accepted Answer

The answer of Typically,small business owners should prepare a projected...

Question 13

The shorter a company's cash flow cycle,the more likely it is to encounter a cash crisis.

Accepted Answer

The shorter a company's cash flow cycle, the less likely it is to encounter a cash crisis. This is because a shorter cycle means that the company is able to collect cash from customers more quickly and efficiently, which improves cash flow and reduces the risk of running out of funds.

Question 14

A highly profitable business is a highly liquid business.

Accepted Answer

The answer of A highly profitable business is a highly...

Question 15

Profit is the difference between a company's total revenue and its total expenses.

Accepted Answer

Profit is defined as total revenue minus total expenses. Therefore, the statement is true.

Question 16

The cash budget is nothing more than a forecast of the firm's cash inflows and outflows for a specific time period,and it will never be completely accurate.

Accepted Answer

The cash budget is a forecast and is based on assumptions, which means it will never be completely accurate. It is important to regularly review and adjust the cash budget as actual inflows and outflows may differ from the forecasted amounts.

Question 17

Depreciation and debt expenses are often left off the cash budget but need to be included to accurately forecast cash requirements for running the business.

Accepted Answer

The answer of Depreciation and debt expenses are often left...

Question 18

A small firm's minimum cash balance should be two times its average weekly sales.

Accepted Answer

There is no standard or set formula for determining a small firm's minimum cash balance. It is subject to various factors such as the firm's expenses, industry norms, and growth plans. Thus, it is not accurate to suggest that the minimum cash balance should be two times the average weekly sales.

Question 19

A small company's cash balance is the difference between total revenue and total expenses.

Accepted Answer

A small company's cash balance is not just the difference between total revenue and total expenses. It also takes into account other factors such as investments, loans, and payments received or made.

Question 20

The primary problem with cash management tools is that they are too complex and time consuming for small business owners to use practically.

Accepted Answer

The answer of The primary problem with cash management tools...

Quiz 12: Managing Cash Flow