Final answer:
GS Cookie Co. can repay its full outstanding line of credit balance of $15,000 in January and February, as it has enough net cash flow to maintain its desired cash balance of $5,000 and clear the debt. The correct answer is option A. $15,000
Step-by-step explanation:
To determine how much GS Cookie Co. can repay from its line of credit based on the cash flow forecasts for January and February, we need to calculate the net cash flow for each month and then assess the cumulative effect on the company’s cash balance. The goal is to maintain a cash balance of $5,000.
January:
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- Beginning Cash Balance: $5,000
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- Cash Receipts: $18,000
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- Cash Payments: $6,000
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- Ending Cash Balance: $5,000 + $18,000 - $6,000 = $17,000
Since GS Cookie aims to maintain a cash balance of $5,000, they have an excess of $12,000 ($17,000 - $5,000) in January.
February:
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- Beginning Cash Balance: $17,000
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- Cash Receipts: $20,000
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- Cash Payments: $8,000
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- Ending Cash Balance: $17,000 + $20,000 - $8,000 = $29,000
Again, GS Cookie will maintain a cash balance of $5,000, which means they have an excess of $24,000 ($29,000 - $5,000) in February. Therefore, over January and February, GS Cookie can repay a total of $12,000 + $24,000 = $36,000. Given that the outstanding line of credit is $15,000, GS Cookie can repay this in full.
The correct answer to the question is Option A: $15,000, as this is the total outstanding balance on the line of credit and GS Cookie has sufficient excess cash to pay this off.