Can someone help me with the calculations behind the solution given? 1) How do t

Question

Can someone help me with the calculations behind the solution given?

1) How do t=you calculate the beggining cash balance and how do ou determine the borrowings?

-6A. Prepare Cash Budget For 3 Months Brewster Corporation expects the following cash receipts and disbursements during the first quarter of 2016 (receipts exclude new borrowings and disbursements exclude interest payments on borrowings since January 1, 2016): L04 January February March 240,000 320,000 260,000 The expected cash balance at January 1,2016, is $42,000. Brewster wants to maintain a cash balance at the end of each month of at least $40,000. Short-term borrowings at 1% interest per month will be used to accomplish this, if necessary. Borrowings (in multiples of $1,000) will be made at the beginning of the month in which they are needed, with interest for that month paid at the end of the month. Prepare a cash budget for the quarter ended March 31, 2016.

Explanation / Answer

Brewster Corporation

Cash Budget

Brewster Corporation

Cash Budget

for the quarter ended March 31, 2016

January

February

March

Quarter

Beginning cash balance

$42,000

$62,000

$40,810

$144,810

Cash receipts

$260,000

$280,000

$250,000

$790,000

cash available

$302,000

$342,000

$290,810

$934,810

Cash disbursements

$240,000

$320,000

$260,000

$820,000

Excess of cash/(deficiency)

$62,000

$22,000

$30,810

$114,810

Financing:

Borrowings

$19,000

$10,000

$29,000

Repayments

Interest

($190)

($290)

($480)

Total Financing

$18,810

$9,710

$28,520

Ending Cash Balance

$62,000

$40,810

$40,520

$143,330

The beginning cash balance for January is provided in the Q.

The company requires to maintain a minimum cash balance of $40,000.

And to do so, the company can borrow in multiples of 1,000 in the beginning of the month and pay 1% interest per month at the end of the month.

So, first we determine the excess or deficiency of cash.

Then we compare the excess/(deficiency) with the minimum required balance.

For instance, in the month of February, the excess of cash available over disbursements is $22,000. But the same is not sufficient to maintain the minimum required balance of $40,000.

Hence we need to borrow the difference – 18,000. However, the company has to pay 1% interest at the end of the month. So, after paying interest, again the company falls short by $180 ($22,000 + $18,000 -$180) = $39,820.

So, the company would borrow $19,000 to ensure an overall ending balance of $40,000. After borrowings and interest payments at the end of the month, the ending balance should be not less than $40,000. Hence, the company borrows $19,000 to have a cash balance of $40,810 (more than $40,000).

Likewise, in the month of March, the company’s excess of available cash is $30,810 and hence the company borrows $10,000 to cover the interest payments as well as to ensure the minimum balance.

Brewster Corporation

Cash Budget

for the quarter ended March 31, 2016

January

February

March

Quarter

Beginning cash balance

$42,000

$62,000

$40,810

$144,810

Cash receipts

$260,000

$280,000

$250,000

$790,000

cash available

$302,000

$342,000

$290,810

$934,810

Cash disbursements

$240,000

$320,000

$260,000

$820,000

Excess of cash/(deficiency)

$62,000

$22,000

$30,810

$114,810

Financing:

Borrowings

$19,000

$10,000

$29,000

Repayments

Interest

($190)

($290)

($480)

Total Financing

$18,810

$9,710

$28,520

Ending Cash Balance

$62,000

$40,810

$40,520

$143,330

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.