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, $75,000; accounts receivable, $240,000; and accounts payable, $81,000.

• Mary and Kay, Inc. maintains a $75,000 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	$	600,000		$	690,000		$	705,000
Merchandise purchases		420,000			450,000			570,000
Cash operating costs		108,000			87,000			150,000
Proceeds from sale of equipment		—			—			30,000

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

1) Cash collections:	January	February	March
Collection of accounts receivable ($240,000*20/100)	48000
Add: Collection of January Sales ($600,000*60/100); ($600,000*30/100)	360000	180000
Add: Collection of February Sales ($690,000*60/100); ($690,000*30/100)		414000	207000
Add: Collection of March Sales ($705,000*60/100)			423000
Add: Sale of equipment			30000
Total Cash Collections	408000	594000	660000
2) Cash disbursements:	January	February	March
Payment of accounts payable	81000
Add: Payment of January purchases ($420,000*60/100); ($420,000*40/100)	252000	168000
Add: Payment of February purchases ($450,000*60/100); ($450,000*40/100)		270000	180000
Add: Payment of March purchases ($570,000*60/100)			342000
Add: Cash operating costs	108000	87000	150000
Total Cash disbursements	441000	525000	672000
3) Cash Budget	January	February	March
Beginning cash balance	75000	75000	110753
Add: Total receipts	408000	594000	660000
Subtotal	483000	669000	770753
Less: Total disbursements	441000	525000	672000
Cash excess (deficiency) before financing	42000	144000	98753
Financing:
Borrowing to maintain $75,000 balance ($75,000 - $42,000)	33000	0	0
Loan principal repaid	0	-33000	0
Loan interest paid ($33,000*9/100*1/12 months)	0	-248	0
Ending cash balance	75000	110753	148133