Reference no: EM133080774

Question - You are the management accountant of Milling Company Namibia ("MCN") and you have been asked to prepare as cash budget for six month from July to December 2021. The following information is presented to you:

Trade receivables and trade payables at 30 June 2021 were N$80 000 and N$84 000 respectively.

MCN expects to sell 700 units in each of July and August, 900 units in each of September and October, 1,200 units in November and 800 units in each of December 2021 and January 2022. The selling price of each unit is calculated by adding a mark- up of 50% to the unit cost price of N$120.

20% of each month's sales will be for cash and will be subject to a 5% cash discount. The remainder will be sold on credit and be paid for in the month following the month of sale.

Purchases in each month will be sufficient to meet the next month's sales. They will be paid for in the month following the month of purchase and be subject to a 2% settlement discount. No other inventories will be held.

Bank overdraft interest will be paid at 1% per month based upon the previous month's closing balance.

Required -

1. Prepare a cash budget for MCN for the six months from July to December 2021 in a table format. Each month should be presented as a column in the table. Show all relevant workings.

2. The management of MCN who are not from a financial background are confused about the difference between a bank loan and bank overdraft. Explain to them the major differences.

3. The management of MCN who are not from a financial background are confused that the profit or loss of a business at the end of a financial period does not agree with the cash flow balance at the same date. Explain why this is normally the case citing two reasons.