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27 May, 22:11

Northern Company is preparing a cash budget for June. The company has $12,000 cash at the beginning of June and anticipates $30,000 in cash receipts and $34,500 in cash disbursements during June. Northern Company has an agreement with its bank to maintain a cash balance of at least $10,000. As of May 31, the company owes $15,000 to the bank. To maintain the $10,000 required balance, during June the company must:

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  1. 27 May, 22:24
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    Save additional $17,500 or reduce disbursement by that much

    Explanation:

    The cash budget of the company would be as follows:

    May 31 owed to be bank ($15,000)

    June 1 opening cash balance $12,000

    June expected cash receipts $30,000

    June expected cash disbursement ($34,500)

    Net cash flow at the end of June (excluding bank) : $7,500

    Net cash flow (including bank) : $7,500 - $15,000 = ($7,500)

    Thus, the company will be owing the bank $7,500 by the end of June.

    To maintain the minimum $10,000 positive balance with the bank, the company would need to payback the $7,500 which will be owed by the end of June, and make additional deposit of $10,000.

    Total deposit required = $7,500 + $10,000 = $17,500.

    This can be achieved by reducing expected disbursement by $17,500 or via other means.
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