Mary and Kay, Inc., a distributor of cosmetics throughout Florida, is in the pro

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:

Additional data:

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.

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

Explanation / Answer

Ans:

Cash collection for January through March

Particulars

Jan

Feb

March

Collection of account receivable

47000

Collection of Jan Sales

354000

206500

Collection of Feb Sales

408000

238000

Collection of March Sales

417000

Sale of equipment

29000

Total Cash Collection

401000

614500

684000

Working:

Since only 20% of account receivable is received in Jan that's why 235000*20% = 47000

Cash Disbursement for January through March

Particulars

Jan

Feb

March

Payments of account payable

80000

Payment of Jan Purchase

287000

(410000*70%)

123000

(410000*30%)

Payment of Feb Purchase

308000

(440000*70%)

132000

(440000*30%)

Payment of March Purchase

392000

(560000*70%)

168000

(560000*30%)

Cash Operation Cost

107000

86000

149000

Total Cash Disbursement

474000

909000

449000

Working:

Balance in Accounts payable is 30% of purchases in December hence completely paid in January.

.

Financing Cash Flow for January through March

Particulars

Jan

Feb

March

Beginning Cash Balance

90000

90000

90000

Total Receipts

401000

614500

684000

Subtotal

491000

704500

774000

Less: Total Disbursement

474000

909000

449000

Cash Excess/Deficiency

17000

-204500

325000

Financing

Borrowing to maintain $90000 Balance

73000

294500

0

Loan Principal Repaid

230000

Loan Interest Paid

3997.5

Ending Cash Balance

90000

90000

91002.5

Working

Interest Calculation is as follows

73,000*9%*3/12 + 157,000*9%*2/12 = $3997.5

Need to maintain $90000 all time, hence only 157,000 is paid and balance is outstanding.

Cash collection for January through March

Particulars

Jan

Feb

March

Collection of account receivable

47000

Collection of Jan Sales

354000

206500

Collection of Feb Sales

408000

238000

Collection of March Sales

417000

Sale of equipment

29000

Total Cash Collection

401000

614500

684000

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