Cement Works has a beginning cash balance for the quarter of $1,211. The company requires a minimum cash balance of $1,200 and uses a loan account to maintain that balance. If funds have been borrowed, then they are repaid as soon as excess funds are available. Currently, the outstanding loan balance is $1,318. How much will be borrowed or repaid this quarter if the quarterly receipts are $4,209 and the quarterly disbursements are $3,807.

Question

Quizplus · Accepted Answer

First, we need to calculate the net cash flow for the quarter:

Net cash flow = quarterly receipts - quarterly disbursements
Net cash flow = $4,209 - $3,807
Net cash flow = $402

The beginning cash balance ($1,211) plus the net cash flow ($402) gives us a total available cash of $1,613. However, since Cement Works requires a minimum cash balance of $1,200, we need to subtract that from the available cash to get the excess cash:

Excess cash = total available cash - minimum cash balance 
Excess cash = $1,613 - $1,200
Excess cash = $413

Since there is an outstanding loan balance of $1,318, we need to repay the loan with the excess cash:

Repay = excess cash - outstanding loan balance
Repay = $413 - $1,318
Repay = -$905

The negative result means that we don't have enough excess cash to repay the loan in full, so we'll only repay as much as we can. Therefore, the best choice is to repay $413 (Option D).

Cement Works Has a Beginning Cash Balance for the Quarter