On January 1, Patel Company has a beginning cash balance of $21,000. During the year, the company expects cash disbursements of $170,000 and cash receipts of $145,000. If Patel requires an ending cash balance of $20,000, the company must borrow
A) $16,000.
B) $20,000.
C) $24,000.
D) $46,000.

Question

Quizplus · Accepted Answer

To determine the amount Patel Company must borrow, we need to calculate its net cash flow for the year, which is the difference between cash receipts and cash disbursements:

Net cash flow = Cash receipts - Cash disbursements
Net cash flow = $145,000 - $170,000
Net cash flow = -$25,000

This negative net cash flow means that Patel Company will require financing in order to meet its cash requirements for the year. We also know that Patel requires an ending cash balance of $20,000.

Ending cash balance = Beginning cash balance + Net cash flow
$20,000 = $21,000 + Net cash flow
Net cash flow = -$1,000

This means that Patel Company will need to borrow an amount equal to the difference between its negative net cash flow and the desired ending cash balance:

Amount to borrow = |- $25,000 - (-$1,000)| = $24,000

Therefore, the best choice is C, $24,000.

On January 1, Patel Company Has a Beginning Cash Balance