Question

Precautionary money balance is needed due to _________.

• A. uncertainty of receipt of income and expenditure
• B. conservative nature of human being
• C. expectation of good investment opportunities
• D. desire to be not out of money

Answer 1

The correct option is A uncertainty of receipt of income and expenditure

Precautionary motive of money refers to the demand for money to store it for future uncertainties. In other words, if money is demanded so that it can be kept for bad days then the demand of such money is known as precautionary money.
Precautionary money balance in needed in a company so that it can be used if there is any uncertainty of receipt in the income and expenditure statement which means the company can make use of this money if the expenditure exceeds the income in a particular year.