Your firm has a net cash inflow for the quarter of -$30 (negative). The beginning cash balance is $15. Company policy is to maintain a minimum cash balance of $5 and borrow only the amount that is necessary to maintain that balance. How much does your firm need to borrow to have a zero cumulative surplus?
A) $10
B) $15
C) $20
D) $25
E) $30

Question

Quizplus · Accepted Answer

Since the net cash inflow is negative, the company needs to borrow money to reach the minimum cash balance of $5. Thus, the initial borrowing required is $15 - $5 = $10. 
However, since the question asks for the amount needed to have a zero cumulative surplus, we need to subtract the cumulative negative cash inflow of -$30 from the initial borrowing of $10. Thus, the total borrowing required is $10 - (-$30) = $10 + $30 = $40. 
Since the company policy is to borrow only the amount necessary, we choose the option that is closest to the total borrowing required, which is C) $20.

Your Firm Has a Net Cash Inflow for the Quarter