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Danner Company expects to have a cash balance of $45,495 on January 1, 2017. Relevant monthly...

Question:

Danner Company expects to have a cash balance of $45,495 on January 1, 2017. Relevant monthly budget data for the first 2 months of 2017 are as follows. Collections from customers: January $85,935, February $151,650. Payments for direct materials: January $50,550, February $75,325. Direct labor: January $30,330, February $45,495. Wages are paid in the month they are incurred. Manufacturing overhead: January $21,231, February $25,275. These costs include depreciation of $1,517 per month. All other overhead costs are paid as incurred. Selling and administrative expenses: January $15,165, February $20,220. These costs are exclusive of depreciation. They are paid as incurred. Sales of marketable securities in January are expected to realize $12,132 in cash. Danner Company has a line of credit at a local bank that enables it to borrow up to $25,275, The company wants to maintain a minimum monthly cash balance of $20,220. Required: Prepare a cash budget for January and February.

Credit-line in Cash Budget preparation:

Credit-line allowed by bank plays an important role in the preparation of the cash budget. In certain cases, if a company has a cash deficit then, it could borrow from the bank. A cash budget is an important budget which is prepared in advance to smooth running of the operations. For the proper running of the business, company must have adequate cash balance to fulfill its commitments.

Answer and Explanation: 1

Prepare cash budget as follows: -

Cash Budget
Particulars January February
Beginning cash balance $45,495 $27,803
Add: Cash receipts from customers $85,935 $151,650
Add: Cash receipts from sales of securities $12,132 $0
Less: Payment for direct materials $(50,550) $(75,325)
Less: Payment for direct labor $(30,330) $(45,495)
Less: Payment for manufacturing overhead $(19,714) $(23,758)
Less: Cash payments for selling and administrative expense $(15,165) $(20,220)
Total cash available (a) $27,803 $14,655
Excess (deficit) cash balance (a - $20,220) $7,583 $(5,565)
Ending cash balance (See note 1) $27,803 $20,220
Loan balance-Beginning of month $0 $0
Interest Payment $0 $0
Additional loan (loan repayment) $0 $5,565
Loan balance End of month $0 $5,565

Note: In the month of January the company has adequate cash of $27,803 which is above the minimum required cash balance. In the month of February, the company has a cash balance of $14,655 which below the minimum required cash balance of $20,200 by $5,565. Hence, during February the company need to utilize credit-line allowed by the bank to maintain its minimum cash balance.


Learn more about this topic:

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Cash Budget: Definition & Examples

from

Chapter 17 / Lesson 3

See what cash budgets are, their purpose, and the importance of a cash budget in accounting. Learn how to prepare a cash budget and see cash budget examples.


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