The following information has been extracted from the books of Issa Ltd for the financial year ended 31 December 2013.

Income Statement for the year ending 31 December 2013

\begin{tabular}{|c|c|c|c|}

\hline & $£ 000$ & & $£ 000$ \\

\hline Opening inventory & 90 & \multirow{6}{*}{ Sales } & 750 \\

\hline Purchases & $\frac{490}{580}$ & & \\

\hline Less Closing inventory & 80 & & \\

\hline Cost of goods sold & $\overline{500}$ & & \\

\hline Gross profit & 250 & & \\

\hline & $\underline{\underline{750}}$ & & 750 \\

\hline Administration expenses & 60 & \multirow[t]{6}{*}{ Gross profit } & 250 \\

\hline Selling and distribution expenses & 50 & & \\

\hline Financial charges & 20 & & \\

\hline Depreciation of non-current assets & 20 & & \\

\hline \multirow[t]{2}{*}{ Net profit } & $\underline{100}$ & & \\

\hline & 250 & & 250 \\

\hline

\end{tabular}

Statement of Financial Position as at 31 December $2013^{\text {Authors' note }}$

\begin{tabular}{lrrlrr}

\hline Non-current assets at cost & $£ 000$ & $£ 000$ & & $£ 000$ & $£ 000$ \\

Less Aggregate depreciation

\end{tabular}

The company had commenced the preparation of its budget for the year ending 31 December 2014 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 2014 at a cost of $£ 15,000$. It is anticipated that as a result of this, sales will increase to $£ 900,000$ in 2014.

2 The gross profit/sales ratio will be increased to $35 \%$.

3 A new inventory control system is to be installed in 2014 and it is expected that the inventory level will be reduced by $£ 15,000$ as compared to the 2013 closing inventory.

4 Land and buildings which cost $£ 50,000$ (nil depreciation to date) will be sold in 2014 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 2014. 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 2014 and 1 November 2014. The company planned to pay an interim ordinary share dividend on the increased share capital of 2.5 p per share on 1 July 2014. 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 2013.
8 With the projected sales increases trade accounts receivable are expected to rise to $£ 100,000$ by 31 December 2014. The allowance for doubtful debts is to be adjusted to $7 \frac{1}{2} \%$ of forecast accounts receivable.
9 Other forecast figures as at 31 December 2014.
$£ 000$
Balance at bank $\quad 350.1$
Trade accounts payable $\quad 56.0$
Expense accounts payable $\quad 15.0$
10 Depreciation of $10 \%$ per annum on cost is to be provided on $£ 600,000$ of the company's fixed assets.
\section*{Required:}

(a) A budgeted income statement for the year ending 31 December 2014.
Show the full details of the trading account.

(b) A budgeted statement of financial position as at 31 December 2014.

(c) What advantages accrue to a business by preparing a budget with respect to (i) forecast profitability;
(ii) forecast liquidity?