Question

Network Company Pty Ltd made the following estimates for the three months ending 31 March. This is Network Company’s first period of operation and their starting cash balance is $5 000.

Estimates:

Cash receipts from sales	$600 000
Cash payments for expenses	260 000
Purchase of motor vehicle ($10 000 will not be paid until April)	40 000
Depreciation of motor vehicle	8 000
Repayment of bank loan	50 000

What is the estimated cash balance at 31 March?

	a.	$252 000 deficit
	b.	$260 000 surplus
	c.	$265 000 surplus
	d.	$265 000 deficit
	e.	$252 000 surplus

Answer 1

Network company's estimated cash balance at the end of March 31 is calculated as follows,

We need to consider only cash inflows and outflows. The ending cash balance is calculated by adding opening cash balance and adding all cash receipts. Then we need to subtract all cash disbursements incurred upto March 31. First of all, let us take all the data given in question,

Opening cash balance = $ 5 000

Cash receipts from sale amounting to $ 600 000 will be added along with opening cash balance.

Cash payment for expenses is a cash outflow and $ 260 000 will be subtracted.

Purchase value of Motor car = $ 40 000.

But it is said that $ 10 000 out of this full value will not be paid until April month. Hence, the cash outflow upto March month for purchasing motor car will be only $ 30 000.

Depreciation of Motor car $ 8 000 is not a cash outflow. So there will be no impact on cash inflow or outflow and we need not to consider this.

Repayment of bank loan $ 50 000 is a cash outflow and we need to subtract this also.

So the ending cash balance will be,

Ending cash balance = Opening balance + cash receipts from sale - cash payments for expenses - purchase of motor car - repayment of bank loan.

Ending cash balance = 5 000 + 600 000 - 260 000 - 30 000 - 50 000.

Ending cash balance = $ 265 000 Surplus.

Note:

We only consider $ 30 000 for purchasing motor car because balance $ 10 000 is not paid upto March 31 of period. So we should consider only $ 30 000 as cash outflow.

So Network company is having a $265 000 surplus at the end of March 31.

Hence, option C is the correct answer.

SUMMARY:

Estimated cash balance at the end of March 31 means the available cash at that day. We should consider only cash inflow and outflow. Depreciation expense is not a cash flow and we don't need to consider it. Purchase of motor car amounting to $ 40 000. Out of this, $ 30 000 is our cash outflow because $ 10 000 is not paid until this period. We calculated that ending estimated cash balance is $ 265 000 surplus.

It is surplus because we get a positive balance

Hence, option C is the correct answer.