Exercise 7-14 Ivanhoe Company expects to have a cash balance of $63,000 on Janua

Question

Exercise 7-14

Ivanhoe Company expects to have a cash balance of $63,000 on January 1, 2017. These are the relevant monthly budget data for the first two months of 2017.

Prepare a cash budget for January and February.

January

February

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1. Collections from customers: January $88,000, February $163,000. 2. Payments to suppliers: January $57,000, February $92,000. 3. Wages: January $31,560, February $41,560. Wages are paid in the month they are incurred. 4. Administrative expenses: January $22,560, February $25,560. These costs include depreciation of $1,000 per month. All other costs are paid as incurred. 5. Selling expenses: January $16,560, February $21,560. These costs are exclusive of depreciation. They are paid as incurred. 6. Sales of short-term investments in January are expected to realize $13,560 in cash. Ivanhoe Company has a line of credit at a local bank that enables it to borrow up to $25,000. The company wants to maintain a minimum monthly cash balance of $37,000.

Explanation / Answer

Ivanhoe Company

  Cash Budget

For the Two Months Ending February 28, 2017 (Amounts in $)

** The minimum cash balance is $37,000 and in february excess cash over disbursements is $21,200. Therefore a borrowings of $15,800 ($37,000 - $21,200) is required in the month of february.

Particulars January February Beginning Cash Balance (A) 63,000 37,880 Add: Cash receipts Collection from Customers (a) 88,000 163,000 Sale of short-term investments (b) 13,560 0 Total Receipts (B = a+b) 101,560 163,000 Total available cash (A+B) 164,560 200,880 Less: Cash disbursements Payments to suppliers (c) 57,000 92,000 Wages (d) 31,560 41,560 Administrative expenses (excluding depreciation of $1,000 per month) (e) 21,560 24,560 Selling expenses (f) 16,560 21,560 Total disbursements (C = c+d+e+f) 126,680 179,680 Excess (deficiency) of available cash over disbursements (D = B-C) 37,880 21,200 Financing: Add: Borrowings 0 15,800** Less: Repayments 0 0 Ending cash balance 37,880 37,000

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