Question

Assume the following information for the month of August. June sales= $40,000; July sales=$65,000; August sales= $52,850. All sales are on account and are collected as follows: 20% in thecurrent month. 50% in the month following, 25% in the second month following, and 5%uncollectible. The beginning cash balance is $14,670, with cash payment of $ 24,653. If theminimum cash balance is $50,000, what is the amount needed by the bank, or how much isavailable to pay towards the bank loan? Show the amount needed as positive number, and theamount to repay a loan as a negative number

Answer 1

Explanation:

To find the amount needed or available, we need to calculate the total cash collections and the total cash payments for the month, as well as the ending cash balance.

Total cash collections:

- For June sales: 20% collected in August = $40,000 x 0.2 = $8,000

- For July sales: 20% collected in August + 50% collected in September = $65,000 x 0.2 + $65,000 x 0.5 = $19,500

- For August sales: 20% collected in August + 50% collected in September + 25% collected in October = $52,850 x 0.2 + $52,850 x 0.5 + $52,850 x 0.25 = $31,710

- Total cash collections: $8,000 + $19,500 + $31,710 = $59,210

Total cash payments:

- Cash payment: $24,653

- Ending cash balance required: $50,000

- Total cash payments: $24,653 + $50,000 = $74,653

Ending cash balance:

- Beginning cash balance: $14,670

- Total cash collections: $59,210

- Total cash payments: $74,653

- Ending cash balance: $14,670 + $59,210 - $74,653 = -$735

Since the ending cash balance is negative, the company needs additional funds to cover its cash requirements. The amount needed by the bank is the absolute value of the ending cash balance:

Amount needed by the bank = $|-735| = $735

Since the company needs funds, the amount available to repay a loan is $0 - $735 = -$735, meaning that the company needs to borrow $735 to cover its cash requirements.