Chapter 16, Problem 16MC

In an attempt to better understand RR’s cash position, Johnson developed a cash budget for the first 2 months of the year. She has the figures for the other months, but they are not shown. After looking at the cash budget, answer the following questions:

1. 1. What does the cash budget show regarding the target cash level?
2. 2. Should depreciation expense be explicitly included in the cash budget? Why or why not?
3. 3. What are some other potential cash inflows besides collections?
4. 4. How can interest earned or paid on short-term securities or loans be incorporated in the cash budget?
5. 5. In her preliminary cash budget, Johnson has assumed that all sales are collected and thus that RR has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense? (Hint: Bad debts will affect collections but not purchases.)