Question

Ivanhoe Company expects to have a cash balance of $46,000 on January 1, 2022. Relevant monthly budget data for the first two months of 2022 are as follows: Collections from customers: January $101.000; February $157.000 Payments to suppliers: January $61.000; February $78,000 Direct labour: January $29,000; February $43,000. Wages are paid in the month they are incurred. Manufacturing overhead: January $25.000; February $30.000. These costs include depreciation of $1.000 per month. AIl other overhead costs are paid as incurred. Selling and administrative expenses: January $16,000; February $21,000. These costs are exclusive of depreciation. They are paid as incurred. Sales of marketable securities in January are expected to realize $11.000 in cash. Ivanhoe Company has a line of credit at a local bank. It can borrow up to $28.000. The company wants to keep a minimum monthly cash balance of $28.000. Prepare a Cash budget for January and February

Answer 1

A cash budget for Ivanhoe Company for January and February includes beginning balances, cash collections, disbursements, and considers the minimum cash balance requirement. Ending cash balances before financing are calculated to evaluate the need for borrowing within the available line of credit.

Step-by-step explanation:

To prepare a cash budget for Ivanhoe Company for the months of January and February, we need to account for the beginning cash balance, expected cash collections, cash disbursements, and the minimum cash balance requirement.

January Cash Budget

• Beginning cash balance: $46,000
• Add: Collections from customers: $101,000
• Add: Sales of marketable securities: $11,000
• Subtract: Payments to suppliers: ($61,000)
• Subtract: Direct labour: ($29,000)
• Subtract: Manufacturing overhead: ($25,000) (Note: Overhead includes $1,000 of depreciation, which is a non-cash expense, so the cash overhead is $24,000)
• Subtract: Selling and administrative expenses: ($16,000)
• Minimum cash balance desired: $28,000
• Ending cash balance before financing: To be calculated

February Cash Budget

• Beginning cash balance: (January's ending cash balance)
• Add: Collections from customers: $157,000
• Subtract: Payments to suppliers: ($78,000)
• Subtract: Direct labour: ($43,000)
• Subtract: Manufacturing overhead: ($30,000) (Note: Overhead includes $1,000 of depreciation, so the cash overhead is $29,000)
• Subtract: Selling and administrative expenses: ($21,000)
• Minimum cash balance desired: $28,000
• Ending cash balance before financing: To be calculated

We then determine if the company needs to borrow money to maintain the minimum cash balance in each month by comparing the ending cash balance before financing against the minimum required balance. If borrowing is necessary, it should not exceed the available line of credit.