# CMA Study Group

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## 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
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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

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Kien Nguyen
Unemployed
Ottawa ON
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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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