Hello,
I have a question related to borrowing money as following
Monroe Products is preparing a cash forecast based on the following information.
• Monthly sales: December $200,000; January $200,000; February $350,000; March $400,000.
• All sales are on credit and collected the month following the sale.
• Purchases are 60% of next month's sales and are paid for in the month of purchase.
• Other monthly expenses are $25,000, including $5,000 of depreciation.
If the January beginning cash balance is $30,000, and Monroe is required to maintain a minimum cash balance of $10,000, how much short-term borrowing will be required at the end of February?
a. $60,000.
b. $70,000.
c. $75,000.
d. $80,000.
The solution I received is below
January February
Opening balance $ 30,000 $ 0
Plus collections 200,000 200,000
Less purchases* 210,000 240,000
Less other expenses 20,000 20,000
Closing balance $ 0 $-60,000
Required borrowing = $60,000 + $10,000 = $70,000
However, the question asked for cash needed to borrow AT THE END OF FEBRUARY.
My argument is that 70,000 is the required borrowing since Jan to the end of February, not at the end of February.
Since January has a closing cash balance of 0, 10,000 should already be borrowed at the end of January to maintain the minimum cash balance of 10,000.
Therefore, the new opening balance for February is 10,000, closing for February will be -50,000, and borrowing for the end of February would be 60,000
Which one explanation would you think is more reasonable for this question?
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Kien Nguyen
Unemployed
Ottawa ON
Canada
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