Financial and Managerial Accounting: P23-7 Rizzo's has been in business since January

Financial and Managerial Accounting

Problem 23-7 Budgeted Income Statement and Cash Budget
Rizzo's has been in business since January of the current year. The company buys frozen pizza crusts and resells them to large supermarket chains in five states. The following information pertains to Rizzo's first four months of operations:
Purchases Sales
January 40,000 62,000
February 32,000 49,000
March 44,000 65,000
April 24,000 42,000
May (forecast) 42,000 72,000

Rizzo's expects to open several new sales territories in May. In anticipation of increased volume, management forecasts May sales at $72,000. To meet this demand, purchases in May are budgeted at $42,000. The company maintains a gross profit margin of approximately 40%.
All of Rizzo's sales are on account. Due to strict credit policies, the company has no bad debt expense. The following collection performance is anticipated for the remainder of the year.
Percent collected in month of sale 30%
Percent collected following month of sale 60%
Percent collected second month following sales 10%

Rizzo's normally pays 80% of its purchases in the month that the purchases are made. The remaining amount is paid in the following month. The company's fixed selling and administrative expenses average $12,000 per month. Of this amount, $4,000 is depreciation expense. Variable selling and administrative expenses are budgeted at 5% of sales. The company pays all of its selling and administrative expenses in the month that they are incurred.
Rizzo's debt service is $5,000 per month. Of this amount, approximately $4,500 represents interest expense, $500 is payment of the principal. The company's tax rate is approximately 35%. Quarterly tax payments are made at the end of March, June, September and December.

Instructions:
a. Prepare Rizzo's budgeted income statement for May.
b. Prepare Rizzo's cash budget for May. Assume that the company's cash balance on May 1 is $25,000.
c. Explain why Rizzo's budgeted cash flow in May differs from its budgeted net income.
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