Sparks Corporation has a cash balance of $18,000 on April 1. The company must maintain a minimum cash balance of $10,000. During April, expected cash receipts are $98,000. Cash dis... Sparks Corporation has a cash balance of $18,000 on April 1. The company must maintain a minimum cash balance of $10,000. During April, expected cash receipts are $98,000. Cash disbursements during the month are expected to total $112,000. Ignoring interest payments, during April the company will need to borrow:
Understand the Problem
The question is asking how much Sparks Corporation will need to borrow during April based on its cash balance, expected receipts, and disbursements. The problem involves calculating the net cash flow and determining if additional funds are needed to maintain the minimum cash balance.
Answer
Sparks Corporation will need to borrow $6,000.
Answer for screen readers
Sparks Corporation will need to borrow $6,000.
Steps to Solve
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Identify Initial Cash Balance The initial cash balance for Sparks Corporation on April 1 is $18,000.
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Calculate Expected Cash Receipts Expected cash receipts during April are $98,000.
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Calculate Expected Cash Disbursements The expected cash disbursements during April total $112,000.
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Calculate Net Cash Flow To find the net cash flow for April, use the formula:
$$ \text{Net Cash Flow} = \text{Initial Cash Balance} + \text{Cash Receipts} - \text{Cash Disbursements} $$
Substituting the values:
$$ \text{Net Cash Flow} = 18,000 + 98,000 - 112,000 $$
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Determine Ending Cash Balance Compute the ending cash balance:
$$ \text{Ending Cash Balance} = 18,000 + 98,000 - 112,000 = 4,000 $$
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Assess Minimum Cash Requirement The company needs to maintain a minimum cash balance of $10,000.
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Calculate Money Needed to Borrow To find out how much the company needs to borrow, use:
$$ \text{Amount to Borrow} = \text{Minimum Cash Balance} - \text{Ending Cash Balance} $$
Substituting the values:
$$ \text{Amount to Borrow} = 10,000 - 4,000 = 6,000 $$
Sparks Corporation will need to borrow $6,000.
More Information
This situation reflects a common financial management practice where businesses need to maintain a minimum cash reserve to handle unexpected expenses and maintain liquidity.
Tips
- Failing to correctly calculate the net cash flow by not including all cash inflows and outflows.
- Overlooking the requirement to maintain the minimum cash balance before determining the amount to borrow.
- Confusing cash balances at different points in time (beginning vs. ending).
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