PROBLEM TWO

Gallo Company is a wholesale distributor of premium European chocolates. The companys balance sheet as of April 30 is given below:

GALLO COMPANY

Balance Sheet

April 30

Assets

Cash	$ 8,000
Accounts receivable, customers	52,000
Inventory	34,000
Buildings and equipment, net of depreciation	202,000
Total assets	$296,000

Liabilities and Stockholders Equity

Accounts payable, suppliers	$ 60,000
Note payable	17,000
Capital stock	180,000
Retained earnings	39,000
Total liabilities and stockholders equity	$296,000

The company is in the process of preparing budget data for May. A number of budget items have already been prepared, as stated below:

1. Sales are budgeted at $240,000 for May. Of these sales, $80,000 will be for cash; the remainder will be credit sales. One-half of a months credit sales are collected in the month the sales are made, and the remainder is collected in the following month. All of the April 30 receivables will be collected in May.
2. Purchases of inventory are expected to total $140,000 during May. These purchases will all be on account. Thirty percent of all purchases are paid for in the month of purchase; the remainder is paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.
3. The May 31 inventory balance is budgeted at $55,000.
4. Operating expenses for May are budgeted at $81,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $3,500 for the month.
5. The note payable on the April 30 balance sheet will be paid during May, with $200 in interest. (All of the interest relates to May.)
6. New refrigerating equipment costing $8,000 will be purchased for cash during May.
7. During May, the company will borrow $23,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

REQUIRED:

1. Prepare a cash budget for May. Support your budget with schedules showing budgeted cash receipts from sales and budgeted cash payments for inventory purchases.
2. Prepare a budgeted income statement for May. Use the traditional income statement format.
3. Prepare a budgeted balance sheet as of May 31.