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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

Which of the following is a purpose of preparing a cash flow forecast?

A cash flow forecast identifies expected cash shortages or surpluses ahead of time, so management can arrange borrowing or short-term investment in advance. It does not compute taxable profit or value inventory, which are done through other accounting processes.

  1. ATo calculate the profit earned in the period for tax purposes
  2. BTo identify expected shortages or surpluses of cash so that borrowing or investment can be arranged in advanceCorrect
  3. CTo value the inventory held at the year end

Explanation

A cash flow forecast shows expected receipts and payments over time, highlighting periods of shortage or surplus so action can be planned. Profit for tax is calculated from the accounting records, and inventory valuation is a separate process.

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