Question

Acme Rentals Inc. has the following projected cash flows for the next two months:

(000s)		February	March
Cash inflows		$980	$877
Cash outflows		930	983

a. The company has a target cash balance of $20,000 and will start February with $15,000. What is the company’s forecasted cumulative surplus or borrowing requirements for February and March? Calculations needed. (2 points)

b. Acme has a $45,000 line of credit available to borrow if they are short of funds. Is Acme’s line of credit sufficient to cover any projected cash shortfalls for February and March? No calculations needed. (1 point)

Answer 1

a. The company's forecasted cumulative surplus or borrowing requirement can be calculated using the following formula:

Opening Cash Balance + Cash inflow - Cash outflow - Closing Cash Balance =  Surplus / (Borrowing)

Acme's requirements are calculated below:

Particulars	February	March
Opening Balance (A)	15,000	20,000
Cash Inflow (B)	980,000	877,000
Cash Outflow (C)	(930,000)	(983,000)
Target closing balance (D)	20,000	20,000
(Borrowing) / Surplus [A+B+C-D]	$ 45,000	$ (106,000)

Acme will have surplus of $ 45,000 in February and will have to borrow $ 106,000 in March.

b. Given that Acme has a $45,000 line of credit available to borrow if they are short of funds. Considering the calculations made in part a, we understand that in February, the company will have surplus of $ 45,000 and hence will not need line of credit but in March, the company will have to borrow $ 106,000. Therefore, the line of credit is not sufficient to cover projected cash shortfalls in March.