Question

Sparks Corporation has a cash balance of $14,700 on April 1. The company must maintain a minimum cash balance of $12,000. During April, expected cash receipts are $60,000. Cash disbursements during the month are expected to total $70,000. Ignoring interest payments, during April the company will need to borrow:

a. $4,700

b. $7,300

c. $12,000

d. $10,000

Answer 1

The correct option is B,$7,300

Step-by-step explanation:

The amount the company needs to borrow can be ascertained from a cash plan drawn up below based on the expected cash inflows and outflows in the month as well as the envisaged closing cash balance.

Opening cash balance $14,700

cash receipts $60,000

total available cash $74,700

expected cash outflows $70,000

Expected closing balance$12,000

Total $82,000

The total cash requirement of $82,000 is more than the available cash of $74,700 by $7,300 ($82,000-$74,700)

The amount of borrowing required is $7,300 as shown in the computation above.

Answer 2

B: $7,300

Step-by-step explanation:

Cash Balance 1 April $ 14,700

Add: Cash Receipts $ 60,000

Less: Cash Payments $(70,000)

Net Cash Balance $ 4,700 A

Amount to Borrow $ 7,300 C

Minimum Cash balance $ 12,000 B

B-A = C.

i.e $12,000 - $ 4,700 = $ 7,300