Which of the following is typically NOT considered when constructing a cash budget? a. payments lag b. payment for plant construction c. cumulative cash d. writing off bad debts
The correct answer and explanation is:
Correct Answer: d. writing off bad debts
A cash budget is a financial tool used to estimate a company’s cash inflows and outflows over a specific period. It helps ensure that the company has enough liquidity to meet its obligations, avoid cash shortages, and plan for investments or borrowing needs. When constructing a cash budget, the focus is strictly on cash-related activities — not accounting or non-cash items.
The option “writing off bad debts” is not typically considered in the cash budget because it is a non-cash accounting adjustment. Writing off bad debts refers to recognizing that certain receivables will not be collected. While this affects a company’s income statement and possibly its balance sheet, it does not represent an actual cash inflow or outflow. Therefore, it does not impact cash directly and is excluded from the cash budgeting process.
In contrast, the other options are directly tied to cash flows:
- Payments lag refers to the delay between incurring an expense and actually paying cash. It is crucial for forecasting cash outflows accurately, as it affects when payments will be made.
- Payment for plant construction involves significant capital expenditures, which are major outflows and must be included to understand the company’s cash position.
- Cumulative cash represents the ongoing cash balance over time, factoring in all inflows and outflows. This helps identify periods of surplus or shortage.
In summary, writing off bad debts does not involve the movement of cash, so it is not part of a cash budget. The cash budget deals only with items that affect actual cash — including revenues received, payments made, investments, and borrowings. Non-cash adjustments like depreciation or bad debt write-offs are part of accrual accounting but irrelevant for cash planning.