Question

Sunland Company expects to have a cash balance of $59,800 on January 1, 2022. These are the relevant monthly budget data for the first two months of 2022. 1. Collections from customers: January $92,300, February $189,800. 2. Payments to suppliers: January $52,000, February $97,500. 3. Wages: January $39,000, February $52,000. Wages are paid in the month they are incurred. 4. Administrative expenses: January $27,300, February $31,200. These costs include depreciation of $1,300 per month. All other costs are paid as incurred. 5. Selling expenses: January $19,500, February $26,000. These costs are exclusive of depreciation. They are paid as incurred. 6. Sales of short-term investments in January are expected to realize $15,600 in cash. Sunland Company has a line of credit at a local bank that enables it to borrow up to $32,500. The company wants to maintain a minimum monthly cash balance of $26,000. Prepare a cash budget for January and February. (List items that increase cash balance first.)

Answer 1

To prepare Sunland Company's cash budget for January and February, we compute expected cash inflows and outflows, considering the beginning cash balance, collections, sales of investments, and various expenses, while maintaining a minimum cash balance of $26,000.

Step-by-step explanation:

To prepare a cash budget for Sunland Company for January and February, we need to calculate the expected cash inflows and outflows for each month. The cash inflows include beginning cash balance, collections from customers, and sales of short-term investments. Cash outflows include payments to suppliers, wages, administrative expenses (excluding the non-cash item of depreciation), and selling expenses. The company aims to maintain a minimum monthly cash balance of $26,000.

January:

• Beginning cash balance: $59,800
• Plus collections from customers: $92,300
• Plus sales of investments: $15,600
• Less payments to suppliers: $52,000
• Less wages: $39,000
• Less administrative expenses ($27,300 - $1,300 depreciation): $26,000
• Less selling expenses: $19,500

February:

• Beginning cash balance: (January ending balance)
• Plus collections from customers: $189,800
• Less payments to suppliers: $97,500
• Less wages: $52,000
• Less administrative expenses ($31,200 - $1,300 depreciation): $29,900
• Less selling expenses: $26,000

We then compute ending cash balances for January and February and compare them to the minimum cash balance requirement. If the ending cash balance is below $26,000, the company can draw from its line of credit to fill the gap.