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12 August, 12:15

Western Company is preparing a cash budget for June. The company has $11,000 cash at the beginning of June and anticipates $31,000 in cash receipts and $36,500 in cash disbursements during June. Western Company has an agreement with its bank to maintain a minimum cash balance of $10,000. As of May 31, the company owes $15,000 to the bank. To maintain the $10,000 required balance, during June the company must:

Borrow $10,000.

Borrow $4,500.

Repay $5,500.

Repay $4,500.

Borrow $5,500.

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Answers (1)
  1. 12 August, 12:21
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    Borrow $19,500

    Explanation:

    The movement in the cash balance between the beginning an end of a period may be expressed as

    opening balance + cash collection - cash disbursed = closing balance

    As such, where the company has $11,000 cash at the beginning of June and anticipates $31,000 in cash receipts and $36,500 in cash disbursements during June, the expected closing balance

    = $11,000 + $31,000 - $36,500

    = $5,500

    If the company is owing the bank $15,000 then the company would still owe

    = $5,500 - $15,000

    = ($9,500)

    If the company is expected to maintain a balance of $10,000, the amount to be borrowed must be $10000 in excess of the amount owed the bank. Hence amount to be borrowed

    = $10000 + $9500

    = $19,500
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