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Striker Company estimates its expected cash receipts for the period to be $80,000 and its expected cash disbursements to be $70,000. The beginning cash balance for the period was $5,000. The management wants to maintain a minimum cash balance of $40,000. Knowledge Check 01 How much cash will the company need to borrow?

a. $15,000

b. $25,000

c. $30,000

d. $40,000

2 Answers

4 votes

Final answer:

Striker Company needs to calculate the amount it needs to borrow by comparing its total cash available at period-end with its desired minimum cash balance. After conducting the calculation, it is determined that the company needs to borrow $25,000 to maintain the minimum cash balance of $40,000.

Step-by-step explanation:

The Striker Company needs to calculate how much cash it will need to borrow based on its expected cash receipts, expected cash disbursements, beginning cash balance, and the desired minimum cash balance. The calculation is as follows:

Expected cash receipts: $80,000

Expected cash disbursements: $70,000

Beginning cash balance: $5,000

Minimum cash balance desired: $40,000

To determine the cash surplus or shortfall, we can perform the following steps:

Calculate the net cash flow by subtracting expected cash disbursements from expected cash receipts.

Add the beginning cash balance to the net cash flow.

Compare the result to the minimum cash balance desired.

If the result is less than the minimum cash balance, then the difference is the amount the company needs to borrow.

By following these steps, we find:

Net cash flow = $80,000 (receipts) - $70,000 (disbursements) = $10,000

Total cash available at the end of the period = $10,000 + $5,000 (beginning balance) = $15,000

The total cash available is less than the minimum cash balance desired.

The company needs to borrow = $40,000 (minimum desired) - $15,000 (end balance) = $25,000

Therefore, the correct answer is b. $25,000.

User SiliconValley
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4 votes

Answer:

The correct option is B, $25000

Step-by-step explanation:

The amount that needs to be borrowed is the cash shortfall which is the difference between cash balance calculated considering the present opening cash balance, the cash receipt and disbursement and the budgeted cash balance of $40000

The cash balance now is opening cash balance plus expected cash receipt less expected cash disbursement

Opening cash balance $5000

Cash receipt $80000

cash disbursement ($70,000)

Cash balance $15,000

Budgeted cash balance $40,000

actual cash balance ($15,000)

borrowing $25,000

User MiDaa
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5.0k points