Newtrend Ltd is a new business which has been formed to buy “old” laptop units and modify them to the specific needs of customers. The business will acquire fixed assets costing £200,000 and a stock of 1,000 “old” laptop units on the first day of business. The fixed assets are expected to have a five-year life with no residual value at the end of that time. That is depreciation is charged for five years. Suppliers of “old” laptop units will allow one month’s credit. Customers are expected to take two months’ credit. Wages will be paid as they are incurred in production. Fixed overhead costs will be paid as they are incurred. The stock of finished goods at the end of each quarter will be sufficient to satisfy 20% of the planned sales of the following quarter. The stock of “old” laptop units will be held constant at 1,000 units. It may be assumed that the year is divided into quarters of equal length and that sales, production and purchases are spread evenly throughout any quarter. Required Produce, for each quarter of the first year of operations: (a) The cash budget (show all workings).
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Newtrend Ltd is a new business which has been formed to buy “old” laptop units and modify them to the specific needs of customers.
The business will acquire fixed assets costing £200,000 and a stock of 1,000 “old” laptop units on the first day of business. The fixed assets are expected to have a five-year life with no residual value at the end of that time. That is
- Suppliers of “old” laptop units will allow one month’s credit.
- Customers are expected to take two months’ credit.
- Wages will be paid as they are incurred in production.
- Fixed
overhead costs will be paid as they are incurred.
- The stock of finished goods at the end of each quarter will be sufficient to satisfy 20% of the planned sales of the following quarter.
- The stock of “old” laptop units will be held constant at 1,000 units.
- It may be assumed that the year is divided into quarters of equal length and that sales, production and purchases are spread evenly throughout any quarter.
Required
Produce, for each quarter of the first year of operations:
(a) The
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