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; 30 percent are collected in the following month. Uncollectibles amounting to 10 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, $55,000; accounts receivable, $220,000; and accounts payable, $77,000.

• Mary and Kay, Inc. maintains a $55,000 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	$	560,000		$	650,000		$	665,000
Merchandise purchases		380,000			410,000			530,000
Cash operating costs		104,000			83,000			146,000
Proceeds from sale of equipment		—			—			26,000

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 $55,000 balance Loan principal repaid Loan interest paid Ending cash balance

Answer 1

Part 1

	January	February	march
Collection of accounts receivable	44000
Collection of January sales	336000	168000
Collection of February sales		390000	195000
Collection of March sales			399000
Sale of equipment			26000
Total cash collections	380000	558000	620000

220000*20% =44000

560000*60% = 336000

560000*30% = 168000

650000*60% = 390000

650000*30% = 195000

665000*60% =

Part 2

	January	February	march
Payment of accounts payable	77000
Payment of January purchases	228000	152000
Payment of February purchases		246000	164000
Payment of March purchases			318000
Cash operating costs	104000	83000	146000
Total cash disbursements	409000	481000	628000

380000*60% =228000

380000*40% =152000

410000*60% =246000

410000*40%=164000

530000*60% = 318000

Part 3

	January	February	march
Beginning cash balance	55000	55000	102565
Total receipts	380000	558000	620000
Subtotal	435000	613000	722565
Less: Total disbursements	409000	481000	628000
Cash excess (deficiency) before financing	26000	132000	94565
Financing:
Borrowing to maintain $55,000 balance	29000	0	0
Loan principal repaid	0	-29000	0
Loan interest paid	0	-435	0
Ending cash balance	55000	102565	94565