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:

	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

Required:

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

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

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

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

SOLUTION

(A) Schedule of total cash collections-

	January ($)	February ($)	March ($)
Collection of Accounts receivable ($235,000*20%)	47,000
Collection of January sales ($590,000*60%), ($590,000*35%)	354,000	206,500
Collection of February sales ($680,000*60%), ($680,000*35%)		408,000	238,000
Collection of March sales ($695,000*60%)			417,000
Sale of equipment			29,000
Total cash collections	401,000	614,500	684,000

(B) Schedule of Cash disbursements-

	January ($)	February ($)	March ($)
Payment of accounts payable	80,000
Payment of January purchases ($410,000*70%), ($410,000*30%)	287,000	123,000
Payment of February purchases ($440,000*70%), ($440,000*30%)		308,000	132,000
Payment of March purchases ($560,000*70%)			392,000
Cash operating costs	107,000	86,000	149,000
Total cash disbursements	474,000	517,000	673,000

(C)

	January ($)	February ($)	March ($)
Beginning cash balance	90,000	90,000	113,405
Total receipts	401,000	614,500	684,000
Subtotal	491,000	704,500	799,405
Less: Total disbursements	(474,000)	(517,000)	(673,000)
Cash excess (deficiency) before financing	17,000	187,500	124,405
Financing:
Borrowing to maintain $90,000 balance	73,000
Loan principal repaid		(73,000)
Loan interest paid (73,000*9%*2/12)		(1,095)
Ending cash balance	90,000	113,405	124,405