fm22 18 - e Should depreciation expense be explicitly...

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Mini Case: 22 - 18 e. Should depreciation expense be explicitly included in the cash budget? Why or why not? Answer: No, depreciation expense is a noncash charge and should not appear explicitly in the cash budget that focuses on the actual cash flowing into and out of a firm. However, a firm’s depreciation expense does impact its tax liability, and hence depreciation affects SKI’s quarterly tax payments. f. In his preliminary cash budget, Barnes has assumed that all sales are collected and, thus, that SKI 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.) Answer: It is not realistic to assume zero bad debts. When credit is granted, bad debts should be expected. Collections in each month would be lowered by the percentage of bad debts. Payments would be unchanged, so the result would be that loan balances would be larger and cash surplus balances would be smaller by the difference in the collection amounts.
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