Question

Mary and Kay, Inc., a distributor of cosmetics throughout Florida, is in the process of assembling a cash budget for the first quarter of 20x1. The following information has been extracted from the company’s accounting records:

• All sales are on account. Sixty percent of customer accounts are collected in the month of sale; 35 percent are collected in the following month. Uncollectibles amounting to 5 percent of sales are anticipated, and management believes that only 20 percent of the accounts outstanding on December 31, 20x0, will be recovered and that the recovery will be in January 20x1.

• Sixty percent of the merchandise purchases are paid for in the month of purchase; the remaining 40 percent are paid for in the month after acquisition.

• The December 31, 20x0, balance sheet disclosed the following selected figures: cash, $85,000; accounts receivable, $265,000; and accounts payable, $86,000.

• Mary and Kay, Inc. maintains a $85,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 9 percent interest rate, with borrowings taking place at the beginning of the month and repayments occurring at the end of the month. Interest is paid at the time of repaying principal and computed on the portion of principal repaid at that time.

• Additional data:

	January			February			March
Sales revenue	$	650,000		$	740,000		$	755,000
Merchandise purchases		470,000			500,000			620,000
Cash operating costs		113,000			92,000			155,000
Proceeds from sale of equipment		—			—			35,000

Required:

1. Prepare a schedule that discloses the firm’s total cash collections for January through March.

	January February March Collection of accounts receivable Collection of January sales Collection of February sales Collection of March sales Sale of equipment Total cash collections

2. Prepare a schedule that discloses the firm’s total cash disbursements for January through March.

	January February March Payment of accounts payable Payment of January purchases Payment of February purchases Payment of March purchases Cash operating costs Total cash disbursements

3. Prepare a schedule that summarizes the firm’s financing cash flows for January through March.

	January February March Beginning cash balance Total receipts Subtotal Less: Total disbursements Cash excess (deficiency) before financing Financing: Borrowing to maintain $85,000 balance Loan principal repaid Loan interest paid Ending cash balance

Answer 1

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Cash collection schedule	January	February	March	Total		Accounts Receivable on January 1	265,000.00	A
Collection of accounts receivable	53,000.00			53,000.00	Note B	Collection in January is 20%	53,000.00	B= A*20%
Collection of January sales	390,000.00	227,500.00		617,500.00	Note C
Collection of February sales		444,000.00	259,000.00	703,000.00	Note C	Particulars	January	February	March	Total	Note C
Collection of March sales			453,000.00	453,000.00	Note C	Sales revenue	650,000.00	740,000.00	755,000.00	2,145,000.00
Sale of equipment			35,000.00	35,000.00		Collection in Same month- 60%	390,000.00	444,000.00	453,000.00	1,287,000.00
Total cash collections	443,000.00	671,500.00	747,000.00	1,861,500.00		Collection in next month- 35%	227,500.00	259,000.00	264,250.00	750,750.00
Cash disbursement schedule	January	February	March	Total		Merchandise purchases	470,000.00	500,000.00	620,000.00	1,590,000.00	Note D
Payment of accounts payable	86,000.00			86,000.00		Paid in Same month- 60%	282,000.00	300,000.00	372,000.00	954,000.00
Payment of January purchases	282,000.00	188,000.00		470,000.00	Note D	Paid in next month- 40%	188,000.00	200,000.00	248,000.00	636,000.00
Payment of February purchases		300,000.00	200,000.00	500,000.00	Note D
Payment of March purchases			372,000.00	372,000.00	Note D	Cash operating costs	113,000.00	92,000.00	155,000.00	360,000.00
Cash operating costs	113,000.00	92,000.00	155,000.00	360,000.00		Proceeds from sale of equipment			35,000.00	35,000.00
Total cash disbursements	481,000.00	580,000.00	727,000.00	1,788,000.00
Cash flow schedule	January	February	March	Total
Beginning cash balance	85,000.00	85,000.00	137,930.00
Total receipts	443,000.00	671,500.00	747,000.00	1,861,500.00
Subtotal	528,000.00	756,500.00	884,930.00
Less: Total disbursements	481,000.00	580,000.00	727,000.00	1,788,000.00
Cash excess (deficiency) before financing	47,000.00	176,500.00	157,930.00
Financing:
Borrowing to maintain $85,000 balance	38,000.00	-	-	38,000.00
Loan principal repaid	-	38,000.00	-	38,000.00
Loan interest paid	-	570.00	-	570.00
Ending cash balance	85,000.00	137,930.00	157,930.00
Interest on loan will be 9% of 38,000 for 2 months i.e. 38,000*9%*2/12= $ 570.