A firm has a minimum desired cash balance of $10,000. Any cash shortfalls will be made up with short-term financing. The net cash flow for January is $3,000 and the beginning balance for that month is $5,000: The cash balance for the beginning of February will be:
A) -$2,000
B) $10,000
C) $3,000
D) $18,000

Question

Quizplus · Accepted Answer

The beginning balance for January is $5,000, and the net cash flow for January is $3,000, resulting in an end balance for January of $8,000 ($5,000 + $3,000). Since the firm has a minimum desired cash balance of $10,000 and the end balance for January is below this minimum, the firm will make up the shortfall with short-term financing to reach the minimum desired cash balance of $10,000. Therefore, the cash balance for the beginning of February will be $10,000.

A Firm Has a Minimum Desired Cash Balance of $10,000