ACCA Financial Management (F9) Certification Practice Exam

What is 'retained cash' defined as?

1. Cash needed for initial investment

2. Surplus cash not needed for operational expenses

3. Revenue from asset sales

4. Cash reserves for emergency expenses

The correct answer is: Surplus cash not needed for operational expenses

Retained cash is defined as surplus cash that a company has on hand, which is not required for its day-to-day operational expenses. This excess liquidity can arise when the business generates more cash than it needs to cover its immediate financial obligations, such as paying suppliers, employees, and other operational costs. This surplus cash is crucial for companies as it allows for flexibility in funding new projects, making investments, or responding to unforeseen expenses without the need to seek external financing. It represents a portion of the company's overall cash management strategy, enabling it to maintain stability even in fluctuating market conditions. Retained cash can also be utilized for future growth opportunities, such as acquisitions or capital expenditures. In contrast, the other options describe different aspects of financial management but do not accurately capture the essence of retained cash. For instance, cash needed for initial investment refers to the initial funding required to start operations or for buying assets, while revenue from asset sales pertains to money generated from selling company assets rather than available cash reserves. Cash reserves for emergency expenses relate to funds set aside for unexpected events, which represents a more specific allocation of retained earnings. Thus, the correct definition of retained cash aligns with it being surplus cash not required for operational purposes.