AAA Company is preparing its 3rd quarter budget and provides the following data:
ID: 2654592 • Letter: A
Question
AAA Company is preparing its 3rd quarter budget and provides the following data:
Cash balance at June 30 is projected to be $4,000. The company is required to maintain a minimum cash balance of $5,000 and is authorized to borrow at the end of each month to make up any shortfalls. It may borrow in increments of $5,000 and pays interest monthly at an annual rate of 5%. All financing transactions are assumed to take place at the end of the month. Loan balance should be repaid in increments of $5,000 when there is surplus cash.
How much cash shortfall will the company have at the end of July, before financing?
Select one:
A. $6,500
B. $5,000
C. $2,000
D. $1,250
Jul Aug Sep Cash collections $50,000 $40,000 $48,000 Cash payments: Purchases of inventory 31,000 22,000 18,000 Operating expenses 12,000 9,000 11,600 Capital expenditures 13,000 25,000 0Explanation / Answer
Opening Cash Balance = $ 4,000
Cash Collections in July = $ 50,000
Net Cash Inflows = $ 54,000
Inventory = $ 31,000
OPEX = $ 12,000
CAPEX = $ 13,000
Net Cash Outflows = $ 56,000
Minimm cash balance to be maintained is $ 5,000 to be borrowed in increments of $ 5,000
Net Cash Deficit = $ 54,000 - $ 56,000 = -$ 2,000
Hence, the cash deficit which AAA Company faces before going in for financing is $ 2,000.