AAA Company is preparing its 3rd quarter budget and provides the following data: Cash balance at June 30 is projected to be $4,000. The company is required to maintain a minimum cash balance of $5,000 and is authorized to borrow at the end of each month to make up any shortfalls. It may borrow in increments of $5,000 and pays interest monthly at an annual rate of 5%. All financing transactions are assumed to take place at the end of the month. Loan balance should be repaid in increments of $5,000 when there is surplus cash.
How much cash shortfall will the company have at the end of July, before financing?

Question

AAA Company is preparing its 3rd quarter budget and provides the following data:  Cash balance at June 30 is projected to be $4,000. The company is required to maintain a minimum cash balance of $5,000 and is authorized to borrow at the end of each month to make up any shortfalls. It may borrow in increments of $5,000 and pays interest monthly at an annual rate of 5%. All financing transactions are assumed to take place at the end of the month. Loan balance should be repaid in increments of $5,000 when there is surplus cash.
How much cash shortfall will the company have at the end of July, before financing?

Quizplus · Accepted Answer

Since the cash balance at June 30 is projected to be $4,000 and the company is required to maintain a minimum cash balance of $5,000, there is already a shortfall of $1,000. 
Looking at the budget for July, the total cash disbursements are $45,000, while the total cash receipts are only $42,000, resulting in a cash shortfall of $3,000 before financing. 
However, the company is authorized to borrow at the end of each month to make up any shortfalls, and it may borrow in increments of $5,000. Since the shortfall is only $3,000, the company will only need to borrow $3,000 to meet the minimum cash balance requirement. 
Therefore, the cash shortfall at the end of July before financing is $1,000 + $3,000 = $4,000, and the closest choice is A) $2,000.

AAA Company Is Preparing Its 3rd Quarter Budget and Provides