Which one of the following statements is correct concerning the cash balance of a firm?
A) Most firms attempt to maintain a zero cash balance at all times.
B) The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.
C) Most firms attempt to maximize the cash balance at all times.
D) A cumulative cash deficit indicates a borrowing need.
E) The ending cash balance must equal the minimum desired cash balance.

Question

Quizplus · Accepted Answer

A cumulative cash deficit indicates that the firm is spending more cash than it is receiving, which creates a need for borrowing to maintain a minimum desired cash balance. Most firms try to maintain a minimum desired cash balance, rather than a zero or maximum cash balance, to avoid a cash shortage or excess. The ending cash balance is not necessarily equal to the minimum desired cash balance, as it may be higher or lower depending on the firm's cash inflows and outflows during the budget period. The cumulative cash surplus on a cash budget is equal to the difference between the cash inflows and cash outflows, but it does not necessarily reflect the ending cash balance.

Which One of the Following Statements Is Correct Concerning the Cash