Textbook Problem

Case 4-66 Cash Management

Hollis Corporation has the following budgeted schedule for expected cash receipts and cash disbursement.

Hollis begins July with a cash balance of $20,000, $15,000 of short-term debt, and no short-term investments. Hollis uses the following cash management policy:

1. End-of-month cash should equal plus the excess of expected disbursements over receipts for the next month.
2. If receipts are expected to exceed disbursements in the next month, the current month ending cash balance should be $20,000.
3. Excess cash should be invested in short-term investments unless there is short-term debt, in which case excess cash should first be used to reduce the debt.
4. Cash deficiencies are met first by selling short-term investments and second by incurring short-term debt.

Required:

Discuss the general considerations that help accountants develop a cash management policy.