The following information has been extracted from the books of Issa Ltd for the financial year ended 31 December 2017.

The company had commenced the preparation of its budget for the year ending 31 December 2018 and the following information is the basis of its forecast.
1 An intensive advertising campaign will be carried out in the first six months of 2018 at a cost of £15,000. It is anticipated that as a result of this, sales will increase to £900,000 in 2018.
2 The gross profit/sales ratio will be increased to 35%.
3 A new inventory control system is to be installed in 2018 and it is expected that the inventory level will be reduced by £15,000 as compared to the 2017 closing inventory.
4 Land and buildings which cost £50,000 (nil depreciation to date) will be sold in 2018 for £200,000 cash. Half of the proceeds will be used to buy ordinary shares in another company, Yates Ltd, at an agreed price of £4 per share. (Ignore share commission, etc.)
5 The company planned to capitalise some of its reserves on 1 April 2018. New ordinary shares are to be issued on a one for two basis. Half the funds required will be drawn from the share premium account and the remainder will be taken from retained earnings.
6 Preference share dividends will be paid on 1 May 2018 and 1 November 2018. The company planned to pay an interim ordinary share dividend on the increased share capital of 2.5p per share on 1 July 2018. No final dividend is proposed.
7 Owing to inflation revenue expenses are expected to rise as follows:
Administration expenses will increase by 6%.
Selling and distribution expenses will increase by 8%.

The advertising campaign expenses are in addition to the increase above.
Financial charges will increase by 4%.
These percentage increases are based on the figures for the year ended 31 December 2017.
8 With the projected sales increases trade accounts receivable are expected to rise to £100,000 by 31 December 2018. The allowance for doubtful debts is to be adjusted to 7 1/2% of forecast accounts receivable.
9 Other forecast figures as at 31 December 2018.

10 Depreciation of 10% per annum on cost is to be provided on £600,000 of the company's fixed assets.

Required:
(a) A budgeted statement of profit or loss for the year ending 31 December 2018.
Show the full details of the trading account.
(b) A budgeted statement of financial position as at 31 December 2018.
(c) What advantages accrue to a business by preparing a budget with respect to (i) forecast profitability;
(ii) Forecast liquidity?

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Statement of Profit or Loss for the year ending 31 December 2017 £000 90 490 580 80 500 250 750 Opening inventory Purchases Less Closing inventory Cost of goods sold Gross profit Administration expenses Selling and distribution expenses Financial charges Depreciation of non-current assets Net profit 60 50 20 20 100 250 Sales Gross profit £000 750 750 250 250