question archive Which of the following statements are correct concerning the cash balance of a firm? I
Which of the following statements are correct concerning the cash balance of a firm? I
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Which of the following statements are correct concerning the cash balance of a firm?
I. Most firms plan on maintaining a minimum cash balance at all times.
II. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum cash balance retained by the firm.
III. The cumulative cash surplus at the end of March is used as the beginning cash balance for April when you are compiling a projected monthly cash balance report.
IV. A negative cumulative cash surplus indicates a borrowing need by the firm.
A. I and III only
B. II and IV only
C. I and IV only
D. II and III only
E. I and II only
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The answer is A. I and III only. Rationale is outlined below.
- I. is true. While the definition of the minimum amount of cash will vary widely from frim to firm, all strive to operate at this level so as not to incur undue opportunity costs.
- II. is false. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance.
- III. is true. The cumulative cash surplus at the end of March is used as the beginning cash balance for April when you are compiling a projected monthly cash balance report.
- IV. Is false. There is no such thing as a "negative cumulative cash surplus." The correct phrase is a "cumulative cash deficit."
