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.

•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, $100,000; accounts receivable, $255,000; and accounts payable, $84,000.

•Mary and Kay, Inc. maintains a $100,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 8 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	630,000	720,000	735,000
Merchandise purchases	450,000	480,000	600,000
Cash operating costs	111,000	90,000	135,000
Proceeds from sale of equipment			33,000

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

Answer 1

• All working forms part of the answer
• Amounts are in $
• Only Total cash collection is asked in the question and the same is provided and explained below.
• Working for 60% and 35% of sales

	January	February	March
Sales Revenue (A)	$630000	$720000	$735000
a)60% to be collected in same month (A x 60%)	$378000	$432000	$441000
Collected in	January	February	March
b)35% to be collected in following month (A x 35%)	$220500	$252000	$257250
Collected in	February	March	Not collected till March

• Total cash collection based on above working

	January ($)	February ($)	March ($)
Collection of accounts receivable	[255000 x 20%] 51000	0	0
Collection of January sales [calculated above]	378000	220500	0
Collection of February sales [calculated above]	0	432000	252000
Collection of March sales [calculated above]	0	0	441000
Sale of Equipment	0	0	[given] 33000
Total cash collections	$429000	$652500	$726000
Total cash collection in 3 months	$1,807,500