Pincus Co. expects to have a cash balance of $26,000 on January 1, 2012. Relevant monthly budget data for the first two months of 2012 are as follows.
Collections from customers: January $70,000; February $147,000.
Payments to suppliers: January $45,000; February $69,000.
Salaries: January $38,000; February $40,000. Salaries are paid in the month they are incurred.
Selling and administrative expenses: January $27,000; February $32,000. These costs are exclusive of depreciation and are paid as incurred.
Sales of short-term investments in January are expected to realize $7,000 in cash.
Pincus has a line of credit at a local bank that enables it to borrow up to $45,000.
The company wants to maintain a minimum monthly cash balance of $25,000. Any excess cash above the $25,000 minimum is used to pay off the line of credit.
Instructions
(a) Prepare a cash budget for January and February.
(b) Explain how a cash budget contributes to effective management.