question archive If the cash budget showed a projected cash shortage, the company would most likely Make fewer purchases of inventory so they could control costs
If the cash budget showed a projected cash shortage, the company would most likely Make fewer purchases of inventory so they could control costs
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If the cash budget showed a projected cash shortage, the company would most likely
- Make fewer purchases of inventory so they could control costs.
- Lay off workers for that period.
- Arrange to borrow the necessary cash for that period.
- Cut salaries for that period.
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Answer: c) Arrange to borrow the necessary cash for that period.
Explanation: Making fewer purchase of inventory and laying of workers are not appropriate measures as these will diminish the output of the company. This is because with lower purchases there will be shortage of input to produce the required output which is not an optimum result. Also, by laying off workers the number of units produced will decrease which is again not an optimum solution.
Cutting salary for that period will leave the workers dissatisfied with the company, as a result of which the company may lose some of its experienced staff.
However, by arranging the necessary cash by borrowing money for that period the company can carry out its operations for its period properly. Also, with cash earned through these operations, company will be able to pay off its borrowing in future, which will be a win-win situation for the company.
