Question

Western Company is preparing a cash budget for June. The company has $12,000 in cash at the beginning of June and anticipates $30,000 in cash receipts and $34,500 in cash payments during June. Western Company has an agreement with its bank to maintain a minimum cash balance of $10,000. As of May 31, the company has no loans outstanding. To maintain the $10,000 required balance, during June the company must:

Answer 1

Step-by-step explanation:

To maintain the required minimum cash balance of $10,000, Western Company needs to carefully manage its cash inflows and outflows during June. Let's calculate the necessary steps:

Starting cash balance (June 1): $12,000

Cash receipts (June): $30,000

Cash payments (June): $34,500

Determine the minimum cash balance:

Minimum cash balance: $10,000

Calculate the available cash balance:

Available cash balance = Starting cash balance + Cash receipts - Cash payments

Available cash balance = $12,000 + $30,000 - $34,500

Available cash balance = $7,500

Compare the available cash balance with the required minimum cash balance:

Since the available cash balance ($7,500) is less than the required minimum cash balance ($10,000), Western Company needs to take action to meet the minimum requirement.

Options to maintain the required minimum cash balance:

a) Reduce cash payments: Western Company can analyze its cash outflows and try to reduce expenses or postpone non-essential payments to ensure they don't fall below the required minimum.

b) Use a short-term loan: If reducing cash payments is not sufficient, the company can consider taking a short-term loan to temporarily increase the available cash balance. This loan should cover the shortfall and be repaid as soon as possible to avoid additional costs.

By implementing one or both of these strategies, Western Company can maintain the minimum cash balance of $10,000 required by its agreement with the bank.