Financial Management

Management of Cash
294 Financial Management

5. Concentration Banking helps in :

(a) Reducing Idle Bank Balance (b) Increasing Collection
(c) Increasing Creditors (d) Reducing Bank Transactions
6. The transaction motive for holding cash is for :
(a) Safety Cushion (b) Daily Operations
(c) Purchase of Assets (d) Payment of Dividends
7. Which of the following should be reduced to minimum by a firm ?
(a) Receipt Float (b) Payment of Float
(c) Concentration Banking (d) All of these
8. Cash required for meeting specific payments should be invested with an eye on :
(a) Yield (b) Maturity
(c) Liquidity (d) All of these
9. Baumol Model deals with :
(a) Optimum Cash Balance (b) Optimum Finished Goods
(c) Optimum Receivables (d) All of these
10. Float management is related to :
(a) Cash Management (b) Inventory Management
(c) Receivable Management (d) Raw Materials Management
[Ans. : 1. (d), 2. (c), 3. (b), 4. (b), 5. (b), 6. (b), 7. (a), 8. (b), 9. (a), 10. (a).]
(C) Fill in the blanks :
1. Cash cycle also refer to...........of a firm.
2. The ........... motive for holding cash is for daily operations.
3. ...........model deals with optimum cash balance.
4. ...........is a highly liquid asset which is very essential to keep the business running.
5. The main objective of managing cash is to...........liquidity and profitability to maximise profits.
[Ans. : 1. Operating Cycle, 2. Transaction, 3. Miller orr, 4. Cash, 5. Trade off.

☞ SHORT ANSWER TYPE QUESTIONS

1. Explain the meaning of Cash Management.
2. What are the characteristics of cash ?
3. State the motive of holding cash.
4. What are the functions of Cash Management ?
5. State the objective of Cash Management ?
6. What are the methods of preparing cash budget ?

☞ LONG ANSWER TYPE QUESTIONS

1. What is the meaning of Cash Management also state its objectives.
2. Bring out the important motives for holding cash in a firm. Explain those factors determining the level of cash in
a firm.
3. Discuss the management problem involved in the planning and control of cash. Explain the importance of cash
budget as main tool of cash planning.
4. How the optimum level of working cash is determined ?
5. What is the meaning of cash management also discuss the factors affecting level of cash ?

☞ PRACTICAL QUESTIONS
SHORT NUMERICAL QUESTIONS
1. Calculate cash collection from sale in October, November and December from the following information :
Estimated Monthly Sales of Pinky Ltd.

Months August September October November December

Amounts (`) 1,60,000 1,80,000 1,00,000 1,40,000 1,20,000
Management of Cash 295

If 50% of sales are realised in the next month and balance in the next of next month.
[Ans. Oct. ` 1,70,000, Nov. ` 1,40,000, Dec. ` 1,20,000]
2. Estimate the amount of wages payable in each month from January to March, if the time-lag in payment is 1/8
month.

Month December January February March

Wages ` 10,000 16,000 20,000 24,000

[Ans. Jan. ` 15,250, Feb. ` 19,500, March. ` 23,500]

3. From the following data, compute break-even point on the cash cost basis and total cost basis. `
Cash Fixed Operating Costs 20,000
Decpreciation 5,000
Sales Price per unit 5
Variable Cost per unit 3
[Ans. 15,000 units]
4. Determine the days of cash available from the following data : `
Cash Balance on 1st April 2,10,000
Cash Balance on 30th April 2,40,000
Cash Outflows during April 13,50,000
Assume 30 days in a month.
[Ans. 5 days]
5. From the following particulars prepare cash budget for the month of April : `
Opening Balance of Cash 10,000
Cash Sales 15,000
Collection from Debtors 12,000
Cash Purchase 9,000
Cash Expenses 2,000
Salaries 1,500
Selling Expenses 3,000
Administrative Expenses 1,000
[Ans. ` 20,500]
LONG NUMERICAL QUESTIONS
CASH BUDGET
1. The estimated monthly sales for a company is as follows :
Months : Feb. March April May June
Amount ` 90,000 96,000 54,000 87,000 63,000
If 50% of sales are realised in the next month and balance in the next month; what would be the cash collection
from sale in April, May and June ?
[Ans. April—` 93,000, May—` 75,000, June—` 70,500.]
2. In Amit Ltd. the forecasts relating to wages, factory expenses and administrative expenses are as follows :
Expenses December ` January ` February ` March `
Wages 24,000 30,000 32,000 34,000
Factory Expenses 5,000 5,000 6,000 7,000
Admin. Expenses 3,000 3,000 3,500 3,500
The time-lag in payment of wages is 1/8 month in case of factory expenses 1/4 month and is case of
administrative expenses 1/2 month. Estimate the amount of wages, factory expenses and administrative expenses
payable in each month from January to March.
296 Financial Management

Expenses January February March

Wages ` 29,250 31,750 33,750
Factory Expenses ` 5,000 5,760 6,750
Administrative Expenses ` 3,000 3,250 3,500
3. J. K. Ltd. wishes to arrange overdraft limits with its bankers for the three months period from July to September
2016. The various forecasts are as follows :
Months Sales Purchase Expenses
` ` `
May 72,000 50,000 4,800
June 76,000 58,000 5,600
July 44,000 96,000 4,400
August 72,000 1,00,000 4,000
September 48,000 1,08,000 6,000
Additional Informations :
(i) 50% of the sales were realised in the month following the sale and the remaining 50% in the second month
following.
(ii) Suppliers will be paid in cash in the month of purchase.
(iii) All the sales are made on credit basis.
(iv) Cash balance on 1st July, 2016 was ` 10,000.
On the basis of above informations, prepare a cash budget for the quarter ending September 30, 2016 and
indicate the limits of bank overdraft which the company will require at the end of each month ?
[Ans. : (i) Overdraft : July ` 16,400, August ` 44,000 and September ` 56,000; (ii) Total Overdraft Limit
Required till September = ` 1,16,400.]
4. From the following informations prepare a cash budget for the month of January to April 2016 :
Months Expected Sale Expected Purchases
` `
January 80,000 60,000
February 55,000 1,05,000
March 62,000 95,000
April 53,000 1,15,000
Wages to be paid to workers ` 6,000 each month. Balance at Bank on 1st January, 2016 is expected to be `
16,000. It has been decided by the Management that :
(i) In case of debicit of funds within the limit of ` 10,000 arrangements can be made with the bank.
(ii) In case of deficit of funds exceeding of ` 10,000 but within the limit of ` 50,000 issue of debenture is to be
preferred.
(iii) In case of deficit of funds exceeding ` 50,000 issue of shares is to be preferred.
Assume that the deficit of funds is considered each month separately.
[Ans. : I. When deficit on funds is taken into consideration at a time for four months : Closing balance : Jan. `
1,63,000, Feb. ` 1,07,000, March ` 68,000, April ` Nil, Total Deficit : ` 1,33,000
II. When deficit of funds is taken into consideration months wise :
Closing Balance of Cash : Jan. ` 30,000, Others : Nil.
Issue of Debentures : Feb. ` 26,00, March ` 39,000
Issue of Sahres : April ` 68,000.]
5. Prepare a Cash Budget of Bansal & Co. for April, May and June, 2016 :
Months Sales Purchases Wages Expenses
` ` ` `
January 80,000 45,000 20,000 5,000
February 80,000 40,000 18,000 6,000
March 75,000 42,000 22,000 6,000
April 90,000 50,000 24,000 7,000
May 85,000 45,000 20,000 6,000
June 80,000 35,000 18,000 5,000
Management of Cash 297

Additional Informations :
(i) 10% of the purchases and 20% of the sales are for cash.
(ii) The average collection period of the company is 1/2 month and the credit purchase are paid off regularly
after one month.
(iii) Wages are paid half monthly and the rent of ` 500 included in the expenses paid monthly.
(iv) Cash balance on 1st April may be taken at ` 15,000.
[Ans. (i) Collection from Debtors :
April—` 66,000, May—` 70,000, June—` 66,000
(ii) Payment of Wages :
April—` 23,000, May—` 22,000, June—` 19,000
(iii) Closing Balance of Cash :
April—` 26,200, May—` 35,700, June—` 49,700.]
6. Prepare a cash budget for the quarter ending June 30, 2016 monthwise in a tabular form from the following
informations :

Actual Budgeted
Particulars
Jan. Feb. March April May June
` ` ` ` ` `
Sales 8,000 7,000 6,000 8,500 9,000 8,000
Purchases 4,000 3,000 2,500 3,000 2,500 2,000
Wages 2,000 2,000 1,000 1,500 1,000 1,000
Expenses 500 600 500 800 600 4,000
Additional Informations :
(i) 60% of sales and purchases are for cash.
(ii) Suppliers are paid after one month and credit sales are collected after two months.
(iii) Wages are paid weekly or time lag is 1/4 month and the expenses after one month.
(iv) Rent ` 200 p.m. not included in the expenses.
(v) Income tax payable in May is estimated to be ` 250.
(vi) Cash balance on April 2016 was ` 1,500.
[Ans. Closing Balance of Cash : April ` 4,525, May ` 7,250, June, ` 11,450.]
7. From the following information, prepare cash budget for the period from 1st April to 30th June. The opening
cash balance was ` 4,000 on Ist April :
Selling Factory Adm.
Months Sales Purchases Wages
Expenses Expenses Expenses
` ` ` ` ` `
January 34,000 1,400 16,000 3,000 2,000 1,000
February 32,000 1,500 16,800 3,200 2,200 1,100
March 36,400 1,300 16,600 3,360 1,600 900
April 31,000 1,360 16,600 2,400 2,100 950
May 33,000 1,480 15,200 3,600 2,400 1,080
June 40,000 1,400 13,600 3,200 1,920 1,140
Additional Informations :
(1) Period of credit allowed by suppliers and to customers one month (1 month).
(2) Lag in payment of :
(a) Wages 1/8 month, (b) Factory Expenses 1 month,
(c) Administration Expenses 1 month, (d) Selling Expenses 1 month.
(3) Machinery purchased for ` 10,000 in March payable on delivery.
(4) Building purchased in April for ` 30,000 payable in two equal instalments in May and June.
(5) Commission @ 5% on sales payable one month after sale.
[Ans. : Calculation of Wages : April—` 2,520, May—` 3,450, June—` 3,250
Balance of Cash : April—` 15,660, May—` 5,650, June—` 1,410 (O.D.)]
298 Financial Management

8. Prepare a cash budget of a company for April, May and June 2016 from the following :

Months Sales Purchases Wages Expenses

2016 ` ` ` `
January (Actual) 16,000 9,000 4,000 1,000
February (Actual) 16,000 8,000 3,600 1,200
March (Actual) 15,000 8,400 4,400 1,200
April (Budgeted) 18,000 10,000 4,800 1,400
May (Budgeted) 17,000 9,000 4,000 1,200
June (Budgeted) 16,000 7,000 3,600 1,000
Additional Informations :
(i) 10% of the purchases and 20% of the sales are for cash.
(ii) The average collection period of the company is 1/2 month and credit purchases are paid off regularly after
one month.
(iii) Wages are paid weekly and the rent of ` 100 is included in expenses, is paid monthly.
(iv) Cash balance on 1st April, was ` 3,000 and the company wants to keep it on the end of every month below
this figure, the excess cash being put in fixed deposit.
[Ans. :
April ` May ` June `
Collection from Debtors 13,200 14,000 13,200
Payment of Wages 4,700 4,200 3,700
Payment to Creditors 7,560 9,000 8,100
Cash balance 2,140 1,240 1,140
9. A new company commences business on 1st January, 2016 and deposits ` 50,000 in the bank. This sum will be
insufficient to finance it operations over a period of six months and you are required to prepare a cash budget to
June 30, 2016 to determine the monthly overdraft limits to seek from the company's Banker's. Data supplied to
you are :
(i) Sales are made to one distributor only on 30 days term, 3% discount is given and cheques are received on the
first date of the month following the due date.
(ii) Plant purchases totalling ` 25,000 are to be made in January.
(iii) All purchases are made on net 30 days terms and cheques are posted to creditors on the last date of the
month due.
(iv) Budget figures are :

Jan. ` Feb. ` March ` April ` May ` June `

Purchases 25,000 20,000 15,000 20,000 20,000 25,000
Wages 20,000 25,000 20,000 20,000 25,000 20,000
Cash Expenses 2,000 2,500 2,000 2,000 2,500 2,000
Sales 30,000 35,000 40,000 40,000 45,000 60,000
[Ans. : Overdraft Needed :
Jan. Feb. March April May June
Nil ` 49,500 ` 12,900 ` 3,050 ` 8,700 ` 3,200.]
10. Prepare a cash budget for the quarter ending June, 2016 and estimate the cash requirements of a company on the
basis of information given below :
Sales `
Feb. 15,000
March 12,000
April to June 16,000 (p.m.)
Additional Informations :
(i) Roughly 1/2 the sales are for cash. 80% for the credit sales are collected in the month following sales and
the balance thereafter one month.
(ii) Goods are always purcahsed for cash to avail the discount of 5%. The purchase budget for the quarter (April
to June) is ` 8,000 p.m.
Management of Cash 299

(iii) Wages and Salaries are ` 3,000 p.m.

(iv) Manufacturing and other expenses budgeted for the quarter are :
Manufacturing ` 2,700
Depreciation ` 3,600
Written off Preliminary Expenses ` 600
Administrative Expenses (April to June) 1,000 p.m.
[Ans. : Closing Balance of Cash :
April May June
` 1,800 ` 4,900 ` 8,400]
11. From the following information and the assumption that balance in hand on 1st April 2016, is ` 18,125. Prepare
a cash budget for the month April to June :
Selling & Production Admin.
Months Sales Materials Wages
Distribution Cost Cost
` ` ` ` ` `
January 18,000 6,250 2,500 1,000 1,500 375
February 24,250 7,750 3,025 1,250 1,575 425
March 21,500 6,375 2,650 1,375 1,500 500
April 22,150 7,650 6,250 1,675 1,625 550
May 25,625 9,250 5,500 2,125 2,000 625
June 27,175 9,700 5,750 2,250 2,050 625
Assume that 50% are cash sales. Assets are to be required in the month of April and May. Therefore, provision is
to be made for the payment of ` 2,000 and ` 6,250 for the same. An application has been made to the bank for
the grant of a loan of ` 7,500 and it is hoped that it will be received in the month of April. It is anticipated that a
dividend of ` 8,750 will be paid in May. Debtors are allowed one month's credit. Sales commission @ 2.5% on
sale is to be paid creditors (for goods or overheads) grant one month's credit.
[Ans. : Closing Balance of Cash :
April May June
` 28,896 ` 20,143 ` 26,115]
12. Prepare a Cash Budget of Sanjay & Co. for April, May and June 2016 :
Month Sales ` Purchases ` Wages ` Expenses `
Jan. (Actual) 80,000 45,000 20,000 5,000
Feb. (Actual) 80,000 40,000 18,000 6,000
March (Actual) 75,000 42,000 22,000 6,000
April (Budgeted) 90,000 50,000 24,000 7,000
May (Budgeted) 85,000 45,000 20,000 6,000
June (Budgeted) 80,000 35,000 18,000 5,000
Additional Informations :
(1) 10% of the purchases and 20% of the sales are for cash.
(2) The average collection period of the company is 1/2 month and the credit purchase are paid off regularly
after one month.
(3) The wages are paid half-monthly and the rent of ` 500 included in expenses is paid monthly.
(4) Cash balance on April 1, may be taken at ` 15,000.
[Ans. : Closing balance of cash : April ` 26,000, May : ` 35,700, June ` 49,700]
13. Estimate the cash requirements of Tata Ltd. for June 2016 on the basis of following data :
(1) Sales `
Feb., 2016 25,000
March 2016 20,000
From April to June, 2016 30,000 p.m.
Roughly half of the sales are for cash 90% of the credit sales are collected in the month following the sale and
the balance one month after.
(2) Fruits are always bought for cash to avail of the cash discount of 5%. The purchase budget for the second
quarter (April-June) was 15,000 baskets p.m. at ` 1 per basket.
(3) Wages and salaries for second quarter were budgeted at ` 5,000 p.m.
300 Financial Management

(4) Manufacturing and other expenses were budgeted for the quarter are : Cash Exp., ` 4,500, Depreciation `
7,500, Selling Exp. ` 3,000, Administrative Exp. (in April and May only) ` 2,000.
[Ans. Closing Balance of Cash : April : ` 2,500, May : ` 9,250, June : ` 17,500.]
14. From the following informations prepare a cash budget by the Adjusted Profit and Loss A/c Method :
Balance Sheet of Amit Limited
(as on 31st March, 2016)
Particulars Note No. Fig. of C.Y. Fig. of C.Y.
I. EQUITY AND LIABILITIES : ` `
1. Sahreholder's Fund :
Equity Share Capital 1,25,000
Profit and Loss A/c 1,33,500
2. Non Current Liabilities :
Debentures 73,500
Accumulated Depreciation 50,000
3. Current Liabilities :
Creditors 67,300
Total 4,49,300
II. ASSETS :
1. Non-current Assets
(a) Fixed Assets :
Plant at Cost 2,20,000
(b) Non Current Assets 1,00,000
Investment 1,00,000
2. Current Assets :
Stock 61,900
Debtors 49,000
Cash 18,400
Total 4,49,300

15. Statement of Profit and Loss

(for the year ended......)
Particulars Amount
Gross Profit 2,00,000
Less : Operating Expenses `
Accumulated Depreciation 22,000
Administrative and Selling Expenses 10,000 32,000
Operating Profit 1,68,000
Add : Non Operating Incomes :
Profit on Sale of Investment 2,000
Interest 10,000 12,000
1,80,000
Less : Non-operating Expenses :
Interest Charges 3,000
Loss on Sale of Plant 8,000 11,000
Profit Before Tax 1,69,000
Less : Income Tax 5,000
Profit After Tax 1,64,000
Less : Dividend 10,000
Net Profit
1,54,000
Management of Cash 301

Additional Informations :
(1) New Plant costing ` 80,000 was purchased during the year.
(2) An old plant costing ` 60,000 and accumulated depreciation of ` 42,000 was sold for ` 10,000.
(3) Investment costing ` 10,000 were sold for ` 12,000 on 31st March, 2016 :
`
Debtors 83,200
Stock 92,500
Creditors 1,00,000
Debentures 50,000
Equity Share Issued 50,000
[Ans : Closing balance of Cash : ` 1,36,800.]
CASH FLOW RATIOS
16. Compute cash coverage ratio from the following data :

Particulars Year I Year II

Earnings after Interest and Taxes 1,50,000 2,08,000
Tax Rate 50% 50%
Interest 40,000 46,000
Principal Payment 80,000 90,000
Depreciation 40,000 40,000
[Ans. Year I—1.90 times, Year II—2.22 times.]
17. Compute the cash to average daily purchase Ratio of a firm from the following data :
Year I Year II
Purchase During the Year 31,50,000 36,00,000
Cash 26,250 32,500
Assume 360 days in a year
[Ans. : Year I—3 days, Year II—3.25 days]
18. Determine the days of cash available from following Data : `
Cash balance on 1st April, 2011 90,000
Cash balance on 30th April, 2011 1,00,000
Cash outflows during April, 2011 4,80,000
[Ans. 5.93 or 6 days]
19. From the following data, complete break-even point on the cash cost basis and total cost basis : `
Cash fixed Operating Costs) 1,00,000
Depreciation 40,000
Sale Price per Unit 10
Variable Cost per Unit 6
[Ans. Cash Cost Basis = 25,000 units, Total Cost Basis = 35,000 units]
Cash Management Model or Baumol Model
20. Monthly cash requirements :
Monthly cash requirements according to cash budget ` 32,000
Fixed Cost per Transactions 10
Interest Rate— 13% p.a.
Calculate Optimum Cash Balance.
[Ans. ` 8,000]
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