Question 5 OR (a)
Short note: cash budget
5 marks
- Time to write
- About 10 minutes
From an older CBCS paper
Question
Question 5 OR (a) · 5 marksWrite short notes on these: 5×3=15
- Cash Budget
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- short notesA note opens with the meaning, then two or three key points. No long introduction.
What the paper leaves open
One of the three notes in the printed Q5 OR; the second note (reorder point for inventory) is outside the current syllabus. The question is partly within the current syllabus.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Meaning 1½ marks 1 min
- 2 Purpose 1½ marks 3 min
- 3 Preparation, kinds and limitations 2 marks 4 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Meaning (step 1, 1½ marks): a clear definition and a line on what it covers. It opens the answer, so it takes a minute or two.
Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks.
Try it first. About 10 minutes for 5 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Meaning. A cash budget is an estimate of cash receipts and disbursements during a future period of time: an analysis of the flow of cash in a business over a future short or long period, a forecast of expected cash intake and outlay. It is the most important device for the control of receipts and payments of cash.
Purpose. It shows in advance when the firm will have a shortage of cash (so that a bank overdraft or short-term loan can be arranged in time) and when it will have a surplus (so that it can be invested productively for short periods). It is the most important tool for determining the optimal cash balance.
Preparation (receipts and payments method). For each month (or other period):
| Particulars | |
|---|---|
| Opening cash balance | from the previous period |
| Add: receipts | cash sales, collections from debtors (allowing for the credit period), other income, sale of assets, new capital or loans |
| Less: payments | cash purchases, payments to creditors, wages, expenses (allowing for lags), capital expenditure, interest, tax, dividends |
| Closing cash balance | opening + receipts − payments; carried forward |
Comparing the closing balance with the minimum balance required shows the finance needed or the surplus available.
Kinds. Short-term budgets (weekly or monthly, for day-to-day control) and long-term forecasts (three or more years, for working capital and capital projects).
Limitations. It rests on forecasts of sales and collections, which can go wrong; it needs regular revision.
Where the 5 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning | 1.5 |
| 2 | Purpose | 1.5 |
| 3 | Preparation, kinds and limitations | 2 |
| Total | 5 |
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