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: -
|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|
|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.
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fromChapter 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.