CS Executive · Corporate Accounting and Financial Management · Working Capital Management
Which of the following best describes the 'precautionary motive' for a firm holding cash?
The precautionary motive means holding cash as a reserve against unexpected outflows or delayed receipts. It differs from the transactions motive, which covers routine payments, and the speculative motive, which covers seizing opportunities such as cheap purchases.
- AHolding cash to meet day-to-day payments such as wages and supplier dues
- BHolding cash as a buffer against unexpected cash outflows or delays in receiptsCorrect
- CHolding cash to take advantage of a sudden fall in raw material prices
- DHolding cash to earn interest on idle balances
Explanation
The precautionary motive is the need to keep a cushion for unforeseen contingencies, such as delayed collections or unplanned expenses. Option A is the transactions motive and option C is the speculative motive. Option D is not a recognised motive for holding cash.
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