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, $90,000; accounts receivable, $235,000; and accounts payable, $80,000. •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 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:

Additional data:

	January			February			March
Sales revenue	$	590,000		$	680,000		$	695,000
Merchandise purchases		410,000			440,000			560,000
Cash operating costs		107,000			86,000			149,000
Proceeds from sale of equipment		—			—			29,000

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

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

	January February March Payment of accounts payable Payment of January purchases Payment of February purchases Payment of March purchases Cash operating costs Total cash disbursements

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

	January February March Beginning cash balance Total receipts Subtotal Less: Total disbursements Cash excess (deficiency) before financing Financing: Borrowing to maintain $90,000 balance Loan principal repaid Loan interest paid Ending cash balance

Answer 1

Ans:

Cash collection for January through March
Particulars	Jan	Feb	March
Collection of account receivable	47000
Collection of Jan Sales	354000	206500
Collection of Feb Sales		408000	238000
Collection of March Sales			417000
Sale of equipment			29000
Total Cash Collection	401000	614500	684000

Working:

Since only 20% of account receivable is received in Jan that's why 235000*20% = 47000

Cash Disbursement for January through March
Particulars	Jan	Feb	March
Payments of account payable	80000
Payment of Jan Purchase	287000 (410000*70%)	123000 (410000*30%)
Payment of Feb Purchase		308000 (440000*70%)	132000 (440000*30%)
Payment of March Purchase		392000 (560000*70%)	168000 (560000*30%)
Cash Operation Cost	107000	86000	149000
Total Cash Disbursement	474000	909000	449000

Working:

Balance in Accounts payable is 30% of purchases in December hence completely paid in January.

.

Financing Cash Flow for January through March
Particulars	Jan	Feb	March
Beginning Cash Balance	90000	90000	90000
Total Receipts	401000	614500	684000
Subtotal	491000	704500	774000
Less: Total Disbursement	474000	909000	449000
Cash Excess/Deficiency	17000	-204500	325000
Financing
Borrowing to maintain $90000 Balance	73000	294500	0
Loan Principal Repaid			230000
Loan Interest Paid			3997.5
Ending Cash Balance	90000	90000	91002.5

Working

Interest Calculation is as follows

73,000*9%*3/12 + 157,000*9%*2/12 = $3997.5

Need to maintain $90000 all time, hence only 157,000 is paid and balance is outstanding.