CMA Study Group

Cash borrowing - required minimum cash

  • 1.  Cash borrowing - required minimum cash

    Posted 06-17-2021 11:25 AM
    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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  • 2.  RE: Cash borrowing - required minimum cash

    Posted 06-18-2021 09:12 AM

    Hello Kien,

     

    During February Monroe Products will have paid back the borrowed $10,000. To save funds the short-term borrowing should only cover the period as short as possible.

    Therefore at the end of February borrowing $70,000 will be required.

     

    Best regards,

    Leandra

     

    Sent from Mail for Windows 10

     






  • 3.  RE: Cash borrowing - required minimum cash

    Posted 06-18-2021 12:00 PM
    Thanks Leandra, I think your explanation made sense.

    ------------------------------
    Kien Nguyen
    Unemployed
    Ottawa ON
    Canada
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  • 4.  RE: Cash borrowing - required minimum cash

    Posted 06-29-2021 03:28 AM
    Hello Kien,

    I would like to add few things with the given calculation:

    The solution I received is below
                                                     January            February
    Opening balance                       $ 30,000          $ 10,000
    Plus collections                          200,000          200,000
    Less purchases*                        210,000          240,000
    Less other expenses                 20,000            20,000
    Less paid back borrowed           0                    10,000
    Cash in hand                               $ 0                  $-60,000
    Minimum Cash  required          $ 10,000        $ 10,000
    To be borrowed                          $ 10,000        $ 70,000 (60,000-Cash in hand +10,000-Minimum Cash required)


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    Mohammad Mahabub Alam Mazumdar
    Saudi Arabia
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