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, $65,000; accounts receivable, $175,000; and accounts payable, $68,000. • Mary and Kay, Inc. maintains a $65,000 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: Sales revenue Merchandise purchases Cash operating costs Proceeds from sale of equipment January $470,000 290,000 95,000 February $560,000 320,000 74,000 March $575,000 440,000 137,000 17,000

Answer 1

1) Cash collections:	January	February	March
Collection of accounts receivable ($175,000*20/100)	$35,000
Add: Collection of January Sales ($470,000*60/100); ($470,000*35/100)	$282,000	$164,500
Add: Collection of February Sales ($560,000*60/100); ($560,000*35/100)		$336,000	$196,000
Add: Collection of March Sales ($575,000*60/100)			$345,000
Add: Sale of equipment			$17,000
Total Cash Collections	$317,000	$500,500	$558,000
2) Cash disbursements:	January	February	March
Payment of accounts payable	$68,000
Add: Payment of January purchases ($290,000*70/100); ($290,000*30/100)	$203,000	$87,000
Add: Payment of February purchases ($320,000*70/100); ($320,000*30/100)		$224,000	$96,000
Add: Payment of March purchases ($440,000*70/100)			$308,000
Add: Cash operating costs	$95,000	$74,000	$137,000
Total Cash disbursements	$366,000	$385,000	$541,000
3) Cash Budget	January	February	March
Beginning cash balance	$65,000	$65,000	$131,133
Add: Total receipts	$317,000	$500,500	$558,000
Subtotal	$382,000	$565,500	$689,133
Less: Total disbursements	($366,000)	($385,000)	($541,000)
Cash excess (deficiency) before financing	$16,000	$180,500	$148,133
Financing:
Borrowing to maintain $65,000 balance ($65,000 - $16,000)	$49,000	$0	$0
Loan principal repaid	$0	($49,000)	$0
Loan interest paid ($49,000*9/100*1/12 months)	$0	($367.50)	$0
Ending cash balance	$65,000	$131,133	$148,133