part b

3 Yellow Limited is a newly formed company that uses a budgetary control system. These are their financial projections for the first year of trading: 1. On 1 January, shareholders provide share capital of $250 000. 2. On 1 April, the company will raise a mortgage loan of $60 000. Interest at an annual rate of 8% is payable in equal amounts. The loan is to be repaid in 10 equal annual instalments, the first being made on 30 September. 3. On 1 July, the company will buy equipment of $360 000. Any additional finance will be available by means of a bank overdraft. The equipment will be depreciated using the straight line method over 5 years. 4. Sales will be $100 000 per month and customers will be invoiced at the end of each month and given two month's credit. The gross profit margin will be 40%. 5. Two months' inventory will be held at all times and sufficient inventory will be purchased on 1 January to enable this to be done. Purchases will be made on one month credit. 6. Operating overheads, excluding depreciation, will be $25 000 per month for the first 6 months, increasing to $30 000 per month after that. Operating expenses are supplied on one month's credit. REQUIRED (a) State two advantages of preparing a cash budget. [2] (b) Calculate the level of bank overdraft needed at the end of the first year's trading. [6] (c) Prepare a budgeted income statement for the first year of trading. [6] Additional information The management is concerned about the high costs of using a bank overdraft facility and is considering ways to better manage its working capital to reduce its overdraft. (d) Suggest three ways the management could better manage its working capital to reduce the bank overdraft. [6]