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

SOLUTION

1	Schedule that discloses the firm’s total cash collections for January through March
		January	February	March
	Collection of accounts receivable	48000
	(240000*20%)
	Collection of January sales
	(600000*60/100)	360000
	(600000*30/100)		180000
	Collection of February sales
	(690000*60/100)		414000
	(690000*30/100)			207000
	Collection of March sales			423000
	(705000*60/100)
	Sale of equipment			30000
	Total cash collections	408000	594000	660000
2	Schedule that discloses the firm’s total cash disbursements for January through March
		January	February	March
	Payment of accounts payable	81000
	Payment of January purchases
	(420000*60/100)	252000
	(420000*40/100)		168000
	Payment of February purchases
	(450000*60/100)		270000
	(450000*40/100)			180000
	Payment of March purchases			342000
	(570000*60/100)
	Cash operating costs	108000	87000	150000
	Total cash disbursements	441000	525000	672000
3	Schedule that summarizes the firm’s financing cash flows for January through March
		January	February	March
	Beginning cash balance	75000	75000	110505
	Total receipts	408000	594000	660000
	Subtotal	483000	669000	770505
	Less: Total disbursements	441000	525000	672000
	Cash excess (deficiency) before financing	42000	144000	98505
	Financing:
	Borrowing to maintain $75000 balance	33000
	Loan principal repaid		33000
	Loan interest paid (33000*9%*2/12)		495
	Ending cash balance	75000	110505	98505