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.

• 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, $85,000; accounts receivable, $265,000; and accounts payable, $86,000.

• Mary and Kay, Inc. maintains a $85,000 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	$	650,000		$	740,000		$	755,000
Merchandise purchases		470,000			500,000			620,000
Cash operating costs		113,000			92,000			155,000
Proceeds from sale of equipment		—			—			35,000

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

Preparation of budgets are as follows:-

Schedule of Cash Collections February March January Collection of account receivables (20%) Collection of Jan. Sales (60%: 35%) Collection of Feb. Sales (60%: 35%) Collection of Mar. Sales (60% Sale of Equipment Total Cash collections 53,000.00 $ 390,000.00 227,500.00 $ 444,000.00 $ 259,000.00 453,000.00 35,000.00 $ 671,500.00 $ 443,000.00 747,000.00 Schedule of Cash Disbursements February March January $ Payment of Accounts payable Payment of January Purchases (60% : 40%) Payment of February Purchases (60% 40 % ) Payment of March Purchases (60%) Cash Operating Cost Total Cash disbursements 86,000.00 282,000.00 $ 188,000.00 300,000.00 $ $ 200,000.00 372,000.00 113,000.00 $ 481,000.00 $ 92,000.00 $ 580,000.00 $ $ 155,000.00 727,000.00 o

Interest = $38,000 * 9% * 2/12 = $570

Schedule of firm's financing cash flows February 85,000.00 $ 671,500.00 $ March January $ Beginning cash balance Total Receipts $ 85,000.00 137,930.00 $ 443,000.00 $ 747,000.00 $ $ Subtotal 884,930.00 528,000.00 756,500.00 580,000.00 $ 176,500.00 $ Less: Total Disbursements 481,000.00 $ 47,000.00 $ 727,000.00 Cash excess (deficiency) before financing Financing: 157,930.00 38,000.00 $ Borrowing to maintain $100000 balance Loan principal repaid Loan interest paid Ending Cash balance 38,000.00 $ 570.00 $ $ S 85,000.00 $ 137,930.00 $ 157,930.00