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, $70,000; accounts receivable, $190,000; and accounts payable, $71,000.

• Mary and Kay, Inc. maintains a $70,000 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	$	500,000		$	590,000		$	605,000
Merchandise purchases		320,000			350,000			470,000
Cash operating costs		98,000			77,000			140,000
Proceeds from sale of equipment		—			—			20,000

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.

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, $70,000; accounts receivable, $190,000; and accounts payable, $71,000.

• Mary and Kay, Inc. maintains a $70,000 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	$	500,000		$	590,000		$	605,000
Merchandise purchases		320,000			350,000			470,000
Cash operating costs		98,000			77,000			140,000
Proceeds from sale of equipment		—			—			20,000

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

	January	February	March
Collection of accounts receivable:	38,000	0	0
Collection of January sales	300,000	150,000	0
Collection of February sales	0	354,000	177,000
Collection of March sales	0	0	363,000
Sale of equipment	0	0	20,000
Total cash collections	338,000	504,000	560,000

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

	January	February	March
Payment of accounts payable	71,000	0	0
Payment of January purchases	192,000	128,000	0
Payment of February purchases	0	210,000	140,000
Payment of March purchases	0	0	282,000
Cash operating costs	98,000	77,000	140,000
Total cash disbursements	361,000	415,000	562,000

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

	January	February	March
Beginning cash balance	70,000	70,000	135,655
Total receipts	338,000	504,000	560,000
Subtotal	408,000	574,000	695,655
Less: Total disbursements	361,000	415,000	562,000
Cash excess (deficiency) before financing	47,000	159,000	133,655
Financing:
Borrowing to maintain $70,000 balance	23,000	0	0
Loan principal repaid	0	23,000	0
Loan interest paid	0	345	0
Ending cash balance	70,000	135,655	133,655