Question

Sophisticates, Inc., a distributor of jewelry throughout California, 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, $90,000; accounts receivable, $210,000; and accounts payable, $75,000.
•	Sophisticates, Inc., maintains a $90,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 10 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 $ 540,000 $ 630,000 $ 645,000   Merchandise purchases 360,000 390,000 510,000   Cash operating costs 102,000 81,000 144,000   Proceeds from sale of equipment — — 24,000 Questions: 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 discloses the firm’s cash needs, if any, for January through March.

Answer 1

Solution:

Part 1 --- Schedule that discloses the firm’s total cash collections for January through March

Schedule of Expected Cash Collections
	January	February	March	Quarter
Beginning Accounts Receivable ($210,000*0.3/0.40)	$157,500
January Sales	$324,000 (540000*60%)	$162,000 (540000*30%)
February Sales		$378,000 (630000*60%)	$189,000 (630000*30%)
March Sales			$387,000 (645000*60%)
Total cash collections from on account sales	$481,500	$540,000	$576,000	$1,597,500
Plus: Proceeds from Sale of Equipment			$24,000
Total Cash Collection	$481,500	$540,000	$600,000	$1,621,500

Note – Collection from Beginning Accounts Receivable

Beginning Accounts Receivable = $210,000 represents 40% portion of total sales.

Hence, Total Sales = 210,000 / 40% = $525,000

Collection in January = 525,000*30% = $157,500

Part 2 -- Schedule that discloses the firm’s total cash disbursements for January through March

Schedule of Total Cash Disbursements
Schedule of expected cash disbursements for raw materials
	January	February	March	Quarter
Beginning Accounts Payable	$75,000
Jan Purchases	$216,000	$144,000
Feb Purchases		234000	156000
March Purchases			$387,000
Total Cash Disbursement for Merchandise Purchases	$291,000	$378,000	$543,000	$1,212,000
Plus: Cash Operating Costs	$102,000	81000	$144,000	$327,000
Total Cash Disbursements	$393,000	$459,000	$687,000	$1,539,000

Part 3 --- Schedule that discloses the firm’s cash needs, if any, for January through March

Schedule of Firm's Cash Needs
	January	February	March
Beginning Cash Balance	$90,000	$178,500	$259,500
Add: Total Cash Collections (From Part 1)	$481,500	540000	$600,000
Less: Total Cash Disbursements (From Part 2)	$393,000	$459,000	$687,000
Preliminary Cash Balance	$178,500	$259,500	$172,500
Additional loan (loan repayment)	$0	0	$0
Ending Cash Balance	$178,500	$259,500	$172,500

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