A firm has a minimum desired cash balance of $120,000. Any cash shortfalls will be made up with short-term financing. The net cash flow for January is $80,000 and the beginning balance for that month is $15,000: short-term financing requirements that month will be:
A) -$120,000
B) $25,000
C) $215,000
D) $200,000

Question

Quizplus · Accepted Answer

The firm's minimum desired cash balance is $120,000, and the beginning balance for January is $15,000, so the total desired cash balance at the beginning of January is $135,000. However, the net cash flow for January is only $80,000, leaving a shortfall of $55,000 ($135,000 - $80,000). Since the firm will make up any cash shortfalls with short-term financing, it will need to borrow $55,000 to maintain its minimum desired cash balance. Therefore, the short-term financing requirement for January is $55,000. Adding this to the $15,000 beginning balance, the ending balance for January will be $70,000 ($15,000 + $80,000 - $55,000). Thus, the correct answer is B.

A Firm Has a Minimum Desired Cash Balance of $120,000