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, $90,000; accounts receivable, $210,000; and accounts payable, $75,000. Mary and Kay, Inc. maintains a $90,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 10 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 $ 540,000 $ 630,000 $ 645,000 Merchandise purchases 360,000 390,000 510,000 Cash operating costs 102,000 81,000 144,000 Proceeds from sale of equipment — — 24,000 Required: Prepare a schedule that discloses the firm’s total cash collections for January through March. Prepare a schedule that discloses the firm’s total cash disbursements for January through March. Prepare a schedule that summarizes the firm’s financing cash flows for January through March.

Answer 1

Part 1 – Schedule of Total Cash Collections

Schedule of Cash Collection
	January	February	March	Total/Quarter
Cash Collection from sales on account:
Beginning Accounts Receivable ($210,000*20%)	$42,000
January Sales collected in January (540,000*60%)	$324,000
January Sales collected in February (540,000*30%)		$162,000
February Sales collected in February (630,000*60%)		$378,000
February Sales collected in March (630,000*30%)			$189,000
March Sales collected in March (645,000*60%)			$387,000
Cash Proceeds from Sale of Equipment			$24,000
Total Cash Collection	$366,000	$540,000	$600,000	$1,506,000

Part 2 – Schedule of total cash disbursements

	January	February	March	Total / Quarter
Cash Disbursements for Merchandise Purchases
Accounts Payable Dec31, 20x1	$75,000
January Purchases (60% in Jan and 40% in Feb)	$216,000	$144,000
February Purchases (60% in Feb and 40% in Mar)		$234,000	$156,000
March Purchases (60% in Mar and 40% in Apr)			$306,000
Total Expected Cash Disbursements for Purchase	$291,000	$378,000	$462,000
Cash Operating Costs	$102,000	$81,000	$144,000
Total Cash Disbursements	$393,000	$459,000	$606,000	$1,458,000

Part 3 – Schedule of firm’s financing cash flows for January through March

Cash Budget
	January	February	March	Quarter
Beginning balance	$90,000	$90,000	$143,550	$90,000
Total Cash Collection (Part 1)	$366,000	$540,000	$600,000	$1,506,000
Total cash available	$456,000	$630,000	$743,550	$1,596,000
Less: Cash disbursements
Purchases (Refer Part 2)	$291,000	$378,000	$462,000	$1,131,000
Cash Operating Costs (refer part 3)	$102,000	$81,000	$144,000	$327,000
Total Cash disbursements	$393,000	$459,000	$606,000	$1,458,000
Available before borrowing or repayment	$63,000	$171,000	$137,550	$138,000
Financing
Borrowings	$27,000	$0	$0	$27,000
Repayments	$0	-$27,000	$0	-$27,000
Interest	$0	-$450	$0	-$450
Ending balance	$90,000	$143,550	$137,550	$137,550

Note – Interest rate 10% is given. It is not mentioned that this interest rate is monthly. Hence, the monthly interest rate is calculated.

Interest paid = Borrowings $27,000 * 10% Interest Rate * 2 Months /12 = $450

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