Question

Southland Company is preparing a cash budget for August. The company has $17,000 cash at the beginning of August and anticipates $120,000 in cash receipts and $130,000 in cash disbursements during August. Southland Company wants to maintain a minimum cash balance of $10,000.To maintain the required balance, during August the company must: A. Repay $7,000. B. Borrow $3,000. C. Repay $3,000. D. Borrow $7,000.

Answer 1

The company must borrow $3000 and option B is the correct answer.

Step-by-step explanation:

The minimum cash balance is the required balance that the company should have at the end of the period. The decision to borrow or repay will be taken by comparing the period end balance with the minimum balance. If the period end balance is higher than the minimum balance, the company may decide to repay. If it is lower than the minimum balance, the company should borrow.

The period end balance can be calculated as,

Ending balance = Opening Balance + Cash receipts - Cash disbursements

Ending balance = 17000 + 120000 - 130000

Ending balance = $7000

Difference = 7000 - 10000 = -$3000

As the ending cash balance ($7000) is less than the minimum cash balance required ($10000), the company should borrow for the amount of difference. Thus, the company should borrow $3000