Question

Munoz Medical Clinic has budgeted the following cash flows: ***** Can you please explain in detail – where does the $18,000 come from- This is for the Borrowing (repayment) section**** This is based on the correct answers below according to Connect***? Please explain, I am super confused as to where did $18,000 came from???

	January			February			March
Cash receipts	$	110,000		$	116,000		$	136,000
Cash payments
For inventory purchases		95,000			77,000			90,000
For S&A expenses		36,000			37,000			32,000

Munoz Medical had a cash balance of $13,000 on January 1. The company desires to maintain a cash cushion of $9,000. Funds are assumed to be borrowed, in increments of $1,000, and repaid on the last day of each month; the interest rate is 2 percent per month. Repayments may be made in any amount available. Munoz pays its vendors on the last day of the month also. The company had a monthly $40,000 beginning balance in its line of credit liability account from this year’s quarterly results.

Required

Prepare a cash budget. (Round intermediate and final answers to the nearest whole dollar amounts. Any repayments/shortage should be indicated with a minus sign. )

Cash Budget	January	February	March
Beginning cash balance	$13,000	$9,200	$9,000
Add: Cash receipts	110,000	116,000	136,000
Cash available	123,000	125,200	145,000
Less: Cash payments
For inventory purchases	95,000	77,000	90,000
For S&A expenses	36,000	37,000	32,000
Interest expense per month	800	1,160	1,139
Total budgeted payments	131,800	115,160	123,139
Payments minus receipts
Surplus (shortage)	(8,800)	10,040	21,861
Financing Activity
Borrowing (repayment)	18,000	(1,040)	(12,861)
Ending cash balance	$9,200	$9,000	$9,000

Answer 1

• So the issue is that you don’t know where does that $18,000 in Borrowing (Repayment) section came from.
• Firstly, it is $18,000 a borrowing amount and not repayment.
• Now getting to the part as to where it came from.
• You see, the question states that company wants to maintain $9000 as the minimum cash balance at month end. That means, ending cash balance should not go below $9000.
• In January, however, the disbursements are more than cash available and there is a shortage of $8800 cash in January.
• Now, to fulfil this shortage, amount of cash to be borrowed to make the cash balance exceed $9000. Also, borrowings can only be made in multiple of $1000.
• Negative balance = $8800
  Minimum Balance required = $9000 (positive)

Hence, amount to be borrowed = $8800 (to make the cash balance positive first) + $9000 to make the cash balance reach minimum requirement limit = 8800 + 9000 = $17800.

Since, amount can be borrowed in multiple in $1000, $17,800 cannot be borrowed. Either $17000 can be borrowed or $18000.

If $17000 is borrowed only, the cash balance will not reach minimum cash balance requirement of $9000. Therefore, amount to be borrowed will be $18,000.

This borrowing of $18000 will make ending cash balance of January $9,200 which is above minimum cash balance requirement.