99 Problems Problems 1. Lakewood Laser SkinCare’s ending cash balance as of Janu
ID: 2771448 • Letter: 9
Question
99
Problems
Problems
1. Lakewood Laser SkinCare’s ending cash balance as of January 31, 2012
(the end of its fiscal year 2011) was $10,000. Its expected cash collections and payments for the next six months are given in the following table.
a. Calculate the firm’s expected ending cash balance for each month.
b. Assuming that the firm must maintain an ending cash balance of at least $9,000, how much must they borrow during each month?
c. If the firm must pay 5% annual interest on its short-term borrowing, how does this affect your ending cash balance calculations?
d. Finally, how would your ending cash balance change if the firm uses
any cash in excess of the minimum to pay off its short-term borrowing
in each month?
Month Collections Payemnts Feburary 16,500 19,400 March 18,300 20,800 April 22,700 21,600 May 29,100 24,300 June 32,500 26,700 July 36,000 27,200Explanation / Answer
FEB.
March
April
May
June
July
Opening
Cash Balance
10000
7100
4600
5700
10500
16300
(+)Collection
16500
18300
22700
29100
32500
36000
(-) Payments
19400
20800
21600
24300
26700
27200
Closing Cash Balance
7100
4600
5700
10500
16300
25100
a) The firm’s expected ending cash balance for each month showing in above table.
b) Assuming that the firm must maintain an ending cash balance of at least $9,000, Then the amount to be borrowed during each month calculated as follows:-
FEB.
(9000 - 7100 ) = 1900
March
(9000 - 4600 ) = 4400
April
(9000- 5700 ) = 3300
May
0
June
0
July
0
c) If the firm must pay 5% annual interest on its short-term borrowing, this affect our ending cash balance calculations in following manner.
FEB
March
April
May
June
July
Opening Cash
10000
8905
10585
14820
19620
25420
(+) Collection
16500
18300
22700
29100
32500
36000
(+) Borrowing
1900
4400
3300
0
0
0
(-) Payments
19400
20800
21600
24300
26700
27200
(-) Interest on bank borrowings (Note 1)
=1900 *5%
=95
=4400 *5%
=220
=3300 * 5%
=165
0
0
0
Closing Cash
8905
10585
14820
19620
25420
34220
Note 1:- To simplify the calculation, Interest on borrowings is calculated for entire year i.e. 12 Months. Accordingly, it can also be calculated for 11 month, 10 month & 9 Month for February, March & April respectively assuming borrowing done at the end of beginning of month.
d) ending cash balance changes in folleing manner if the firm uses any cash in excess of the minimum to pay off its short-term borrowingin each month:-
Assuming the Loan of 1900 in FEB, 4400 in March & 3300 in April repaid in May month, Then the closing cash balance of may month will be :- 19620 (Part c) - 1900 - 4400 - 3300 = 10020 (More the minimum cash balance of 9000).
Rest months balances same as calculated in Part (c).
FEB.
March
April
May
June
July
Opening
Cash Balance
10000
7100
4600
5700
10500
16300
(+)Collection
16500
18300
22700
29100
32500
36000
(-) Payments
19400
20800
21600
24300
26700
27200
Closing Cash Balance
7100
4600
5700
10500
16300
25100
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