Asked by Quinn Duncan on Jun 26, 2024
Verified
Which of the following statements best describes cash flows that would be shown on a cash budget?
A) Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation) ; hence, depreciation is set forth on a separate line in the cash budget.
B) If cash inflows from collections occur in equal daily amounts but most payments are made regularly on the 10th of each month, then it is not necessary to use a daily cash budget. A cash budget focused on the end of the month will suffice.
C) Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
D) The cash flows shown on the cash budget are the actual cash inflows and outflows and thus different from the firm's free cash flows, because FCF reflects after-tax operating income and the investments required to maintain future operations.
Cash Flows
The total amount of money being transferred into and out of a business, particularly considered when assessing its liquidity.
Cash Budget
An estimation of the cash inflows and outflows for a business or individual for a specific period, used for managing liquidity and financial planning.
Working Capital Policy
A company's strategy concerning managing its current assets and liabilities to ensure it has sufficient liquidity to meet its short-term obligations.
- Develop and analyze a cash budget.
Verified Answer
JV
Jonissa ValdesJun 29, 2024
Final Answer :
D
Explanation :
The statement that best describes cash flows that would be shown on a cash budget is option D, as it correctly explains that the cash flows shown on a cash budget are the actual cash inflows and outflows, which differs from the firm's free cash flows. Free cash flow reflects after-tax operating income and the investments required to maintain future operations. Option A is incorrect because, while it is true that depreciation is included in the estimate of cash flows, it is not set forth on a separate line. Option B is incorrect because it is always necessary to use a daily cash budget if cash inflows and outflows occur daily, regardless of when payments are made. Option C is incorrect because sound working capital policy is concerned with managing the gap between cash inflows and outflows, not maximizing it.
Learning Objectives
- Develop and analyze a cash budget.