Concept explainers
What are the basic benefits and purposes of developing pro forma statements and a cash budget? (LO4-1)
To explain: The benefits of pro forma statements and cash budget.
Introduction:
Pro Forma Statements:
These are also known as projected financial statements and are an estimation of the financial position of a firm for a given period. These are useful in addressing 'what if' scenarios, determining future cash requirements, and submitting financial proposals.
Cash Budget:
It refers to the budget of expected cash receipts and cash payments. It helps in determining the expected cash surplus and deficit. The purpose of making a cash budget is to gauge the financing needs of a company and estimate its cash position.
Answer to Problem 1DQ
Pro forma statements assist in determining the anticipated inventory levels, receivables, and payables. Additionally, these also help in determining financing requirements. The benefits of cash budget include better credit terms with customers and adequate liquidity during peak seasons.
Explanation of Solution
The following are the benefits of pro forma statements.
i) Pro forma statements allow a firm to estimate its future financing requirements.
ii) These help in determining expected levels of inventory, receivables, and payables.
iii) The formulation of these statements enables a firm to anticipate its profit or loss that it might incur in the future.
The following are the benefits of a cash budget.
i) A cash budget allows a firm to establish credit terms for customers without causing a liquidity crunch.
ii) A cash budget helps a firm in avoiding liquidity issues during its peak business periods.
Want to see more full solutions like this?
Chapter 4 Solutions
Foundations of Financial Management
- Which of the following is an operating budget? A. cash budget B. production budget C. tax budget D. capital budgetarrow_forwardWhich of the financial budgets is the most important? Why?arrow_forward3. Trace the implications of a government budget surplus on the following:a. national savingb. interest ratesc. private investmentd. economic growthe. future living standards When tracing the effects of the budget surplus, list the assumptions you are making.arrow_forward
- the major purpose of which of the following is to prepare an accurate estimate of future cash flows? A. Operating budget B. Cash budget C. Capital budget D. Executive budgetarrow_forwardDiscuss or explain thoroughly. 1. Financial Forecasting vs. Financial Modelling. Explain the difference. 2. Explain the Budget Process.arrow_forward2. Should depreciation expense be explicitlyincluded in the cash budget? Why or why not?arrow_forward
- Describe what a cash budget entails.arrow_forwardDiscuss the importance of the cash budget.arrow_forwardB4) Do you think that these techniques can be used in situations like COVID-19capital budgeting 1. Payback period traditional 2. Discount Payback period modern 3. Net present value 4. Profitability Indexarrow_forward
- why is the cash budget regarded as a primary tool in short term financial planning? Discussarrow_forward. Complete the Contingency Budget for the table below b. If risk C and F actually occurred, you would be able to tap the contingency budget for relief? c. Should you focus on risk F and why?arrow_forwardWhat skills and knowledge would be used to construct a cash budget?arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College