Cash Budget vs. Projected Income Statement – Lecture Review

15 Question-and-Answer flashcards covering definitions, differences, examples, and importance of cash budgets and projected income statements.

Why is learning to prepare budgets considered practical for any future career or household?

Because every business or household needs to plan, monitor, and control cash and profitability through budgeting.

What is a cash budget?

A forecast of the future cash position of a business, setting out expected cash receipts and cash payments for a specific period.

What is a projected income statement?

A forecast of the profit a business expects to generate, listing anticipated incomes and expenses for a future period.

What key distinction separates a cash budget from a projected income statement?

Cash budget focuses on cash flow (receipts and payments), while the projected income statement focuses on profit (income and expenses).

Why are budgets said to rely on both future estimates and historical information?

Past trends help predict future sales, busy periods, and spending patterns used in budgeting forecasts.

Give an example of a payment that is NOT an expense.

Paying a creditor—this reduces a liability but is not an expense.

Give two examples of expenses that are NOT payments.

Depreciation and bad debts—both reduce profit but do not involve a cash outflow.

List the main sections of a cash budget in order.

1) Cash receipts, 2) Cash payments, 3) Cash surplus or shortfall, 4) Opening bank balance, 5) Closing bank balance.

Define liquidity in the context of budgeting.

The ability of a business to meet its short-term cash obligations, i.e., healthy cash flow to pay debts and expenses.

How can a cash budget help when a shortfall is predicted?

It allows the business to arrange an overdraft, cut expenses, or delay purchases before the shortfall occurs.

What is a cash surplus?

When predicted cash receipts exceed predicted cash payments during the budget period.

What is a cash shortfall (deficit)?

When predicted cash payments exceed predicted cash receipts during the budget period.

Name four typical cash receipts included in a cash budget.

Cash sales, receipts from debtors, interest on investments, rent income (others: sale of assets, loan received, investment maturity).

Name four typical cash payments included in a cash budget.

Cash purchases of stock, payments to creditors, operating expenses (e.g., salaries, utilities), owner’s drawings (others: asset purchases, loan repayments, increasing investments).

List five transactions that NEVER appear in a cash budget but DO appear in a projected income statement.

Bad debts, depreciation, discount received, discount allowed, drawings of stock (non-cash transactions).