Mary And Kay Inc. A Distributor Of Cosmetics Throughout Flor
Mary And Kay Inc A Distributor Of Cosmetics Throughout Florida Is
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: 1. All sales are on account. Sixty percent of customer accounts are collected in the month of the sale; 35 percent are collected in the following month. Uncollectibles amounting in 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. 2. 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. 3. The December 31, 20x0, balance sheet disclosed the following selected figures: Cash $20,000, accounts receivable $55,000, and accounts payable $22,000. 4. Mary and Kay, Inc. maintain a $20,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 8 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 the time. 5. Additional data: January February March Sales revenue $150,900 $180,000 $185,000 Merchandise purchases $90,000 $100,000 $140,000 Cash operating costs $31,000 $24,000 $45,000 Proceeds from sale of equipment - - $5,000
Paper For Above instruction
The task involves preparing two essential financial schedules for Mary and Kay, Inc.: a cash collections schedule and a cash disbursements schedule, covering the first quarter of 20x1. These schedules serve as the backbone for understanding the company's cash flow position, which is critical for effective financial management and planning. Accurate preparation of these schedules demands a clear understanding of the sales and purchase assumptions, collection and payment patterns, and the company's existing cash position.
Cash Collections Schedule
The calculation of cash collections begins with analyzing sales data and applying the specified collection percentages. Since all sales are on account, the collections for each month are based on the sales made during that month and the previous month, considering the collection percentages and uncollectibles. It is key to note that 60% of the sales are collected in the month of sale, 35% in the following month, and 5% are uncollectible. Additionally, 20% of the receivables outstanding at December 31, 20x0, are expected to be recovered in January 20x1.
For January, collections include 60% of January sales and 20% of December's receivables (since only 20% are recoverable out of the remaining 35% uncollected in December, plus the collection of 20% from previous receivables). For February and March, similar calculations are applied, adjusting for the relevant sales and collections patterns.
Cash Disbursements Schedule
The disbursements are primarily driven by merchandise and operating costs, with payments structured as 70% in the month of purchase and 30% in the following month. Additionally, cash outflows include operating costs for each month, purchase payments, and any equipment sale proceeds, which in March contribute to cash inflows.
Beginning with cash operating costs and how much of these costs are paid each month, the purchases' payment pattern, and the respect for maintaining the minimum cash balance of $20,000, the schedule details the total outflows for each month. The company also considers financing arrangements, borrowing or repaying to maintain the minimum cash balance, factoring in the interest payments associated with borrowings.
Implementation of Cash Budgeting
Creating these schedules involves meticulous calculation, ensuring that all assumptions are applied correctly. The cash collections and disbursements schedules will enable management to identify periods of cash shortages or surpluses, providing critical insight for timing financing activities. The calculation also involves understanding the interplay between sales, collection efficiencies, purchase payments, and the strategic use of borrowings to uphold liquidity requirements.
Overall, the detailed preparation of these schedules supports effective cash management, ensuring that Mary and Kay, Inc. maintains sufficient cash balances while optimizing the use of available financial resources during the first quarter of 20x1.
Answer
1. Schedule of Total Cash Collections for January through March 20x1
To prepare the cash collections schedule, we analyze the sales data, applying collection percentages and factoring in the outdated receivables from December 31, 20x0.
| Month | Sales | Collections from current month sales (60%) | Collections from prior month (35%) | Recoveries from outstanding December receivables (20%) | Total Cash Collections |
|---|---|---|---|---|---|
| January | $150,900 | $90,540 | $19,250 (from December sales of $55,000: 35% of $55,000 = $19,250; 5% uncollectible) | $11,000 (20% of outstanding receivables from Dec 31, 20x0, which includes 35% of December sales less uncollectibles) | $90,540 + $19,250 + $11,000 = $120,790 |
| February | $180,000 | $108,000 (60% of Feb sales) | $52,650 (35% of Jan sales) | $11,000 (recovery of remaining receivables from December) | $108,000 + $52,650 + $11,000 = $171,650 |
| March | $185,000 | $111,000 (60% of Mar sales) | $63,000 (35% of Feb sales) | $0 (no data indicates recovery from previous months apart from December) | $111,000 + $63,000 + $0 = $174,000 |
2. Schedule of Total Cash Disbursements for January through March 20x1
The disbursement schedule includes the payments for merchandise purchases and operating costs, considering the payment pattern and additional financing needs to maintain the minimum cash balance.
| Month | Merchandise Purchases | Payments for current month purchases (70%) | Payments for prior month purchases (30%) | Operating Costs | Other Outflows (e.g., equipment sale) | Total Cash Disbursements |
|---|---|---|---|---|---|---|
| January | $90,000 | $63,000 (70% of Jan Purchases) | $27,000 (30% of Dec Purchases, assume prior is zero) | $31,000 | - | $63,000 + $27,000 + $31,000 = $121,000 |
| February | $100,000 | $70,000 | $27,000 (30% of Jan Purchases) | $24,000 | - | $70,000 + $27,000 + $24,000 = $121,000 |
| March | $140,000 | $98,000 (70% of Mar Purchases) | $30,000 (30% of Feb Purchases) | $45,000 | $5,000 (sale of equipment) | $98,000 + $30,000 + $45,000 + $5,000 = $178,000 |
Additional notes:
- In months where projected cash balances fall below the $20,000 minimum, the company would need to borrow. Borrowing would be initiated at the beginning of the month and repaid at the end, with interest calculated accordingly.
- Interest payments on borrowed funds are computed based on the amount borrowed and the interest rate, factored into the cash flow schedule if needed.
- Overall, these schedules provide a detailed view of expected cash inflows and outflows, illustrating the company's liquidity position and facilitating effective cash management for the first quarter.
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