Which of the following is a purpose of a cash budget?

Which of the following is a purpose of a cash budget?

• A. Estimates all cash inflows and outflows for period
• B. Determines the company's tax liability
• C. Records depreciation for tax purposes
• D. Sets long-term financing strategy

Answer: (A)

A cash budget is a short-term forecast of cash movements to help manage liquidity. Its main purpose is to estimate all cash inflows and outflows for the period so you can see whether the business will have enough cash to meet obligations, and to plan for any required financing or timing adjustments. Taxes and depreciation involve non-cash or tax-specific considerations and are not the focus of a cash budget. Taxes depend on taxable income and tax rules, while depreciation is an accounting non-cash expense used for tax and financial reporting. Long-term financing strategy looks at funding over a longer horizon, not the day-to-day cash timing a cash budget handles. By projecting receipts and payments, the cash budget highlights potential cash shortfalls or surpluses, guiding timely decisions on borrowing or delaying expenditures.

A cash budget is a short-term forecast of cash movements to help manage liquidity. Its main purpose is to estimate all cash inflows and outflows for the period so you can see whether the business will have enough cash to meet obligations, and to plan for any required financing or timing adjustments.

Taxes and depreciation involve non-cash or tax-specific considerations and are not the focus of a cash budget. Taxes depend on taxable income and tax rules, while depreciation is an accounting non-cash expense used for tax and financial reporting. Long-term financing strategy looks at funding over a longer horizon, not the day-to-day cash timing a cash budget handles. By projecting receipts and payments, the cash budget highlights potential cash shortfalls or surpluses, guiding timely decisions on borrowing or delaying expenditures.