Question

1. Handy Hardware is a retail hardware store. Information about the store’s operations follows.

• November 20x1 sales amounted to $420,000.
• Sales are budgeted at $460,000 for December 20x1 and $420,000 for January 20x2.
• Collections are expected to be 60 percent in the month of sale and 38 percent in the month following the sale. Two percent of sales are expected to be uncollectible. Bad debts expense is recognized monthly.
• The store’s gross margin is 25 percent of its sales revenue.
• A total of 80 percent of the merchandise for resale is purchased in the month prior to the month of sale, and 20 percent is purchased in the month of sale. Payment for merchandise is made in the month following the purchase.
• Other monthly expenses paid in cash amount to $45,400.
• Annual depreciation is $438,000.

The company’s balance sheet as of November 30, 20x1, is as follows:

HANDY HARDWARE, INC. Balance Sheet November 30, 20x1
Assets
Cash	$	46,000
Accounts receivable (net of $7,200 allowance for uncollectible accounts)		154,000
Inventory		300,000
Property, plant, and equipment (net of $1,200,000 accumulated depreciation)		1,744,000
Total assets	$	2,244,000
Liabilities and Stockholders’ Equity
Accounts payable	$	339,000
Common stock		1,610,000
Retained earnings		295,000
Total liabilities and owner’s equity	$	2,244,000

Required:

1. Compute the budgeted cash collections for December 20x1.

2. Compute the budgeted income (loss) before income taxes for December 20x1.

3. Compute the projected balance in accounts payable on December 31, 20x1.

2.

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.

• Seventy percent of the merchandise purchases are paid for in the month of purchase; the remaining 30 percent are paid for in the month after acquisition.

• The December 31, 20x0, balance sheet disclosed the following selected figures: cash, $80,000; accounts receivable, $225,000; and accounts payable, $78,000.

• Mary and Kay, Inc. maintains a $80,000 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	$	570,000		$	660,000		$	675,000
Merchandise purchases		390,000			420,000			540,000
Cash operating costs		105,000			84,000			147,000
Proceeds from sale of equipment		—			—			27,000

Required:

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

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

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

Answer 1

				Amount	Explanation
	Opening Balance of cash			46000
Add	Collections
	Dec Sales	460000		276000	(60 % of Current months sale)
	Nov, Sales	420000		159600	(38 % of last month sales)
Less	Payments
	Purchases for this month (80%)			276000	(80% of Cost of goods sold of Dec)	Current cost of goods sold = 460000-25%of 460000)
	(purchased in Nov, to be paid in this month)				(80% of 345000)
	November 20 % purchases made in novemner			63000	(20 of cost of goods sold of Nov)	(420000-25% of 420000)
	( to be paid in december)				(20 % of 315000)
	Monthly expenses			45400
	Closing cash balance			97200
	Budgeted cash collection	=276000+159600
		435600
	Income/ Loss for decmber			Explanation
	Particualrs		Amount
	Sales		460000
Less	Cost of goods sold		345000	(460000*.75)
	Gross profit		115000
Less	Provision for uncollectibel accounts		9200	(460000*2%)
	Depreciation		36500	(438000/12)
	Monthly exps		45400
	Net profit		23900