Financial Accounting: practice problems and exam questions

The basics of financial accounting: the accounting equation, recording transactions, the financial statements and depreciation of long-term assets.

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Cram pack (PDF)Formula sheets, method steps and practice problems with full solutions, ready to print.

Topics in this course

  1. Financial accountingkey terms and facts · applying the concepts · cases and analysismultiple choice
  2. Depreciationstraight-line · double-declining balance · sum of the years’ digitscalculations

Exam tips for Financial Accounting

  • Assets = liabilities + equity after every single transaction.
  • Depreciation spreads the cost of an asset; it is not a cash payment.
  • Check which depreciation method the question asks for before you start.

Worked examples

Financial accountingEasy

Dividends paid to shareholders are recorded as:

  1. AA reduction of retained earnings in equity
  2. BA non-current liability once paid
  3. CRevenue of the shareholders' company
  4. DAn expense in the income statement for the year
Show hints
  1. They are a distribution of profit, not a cost of earning it.
  2. Two wrong answers are now crossed out. One of the remaining two is right.
Show the answer and explanation

Why this is the answer

Dividends are distributions to owners. They reduce equity (retained earnings) and do not appear as an expense in profit or loss.

Answer

A · A reduction of retained earnings in equity
DepreciationMedium
0€120 00012345678salvage €12 000D = ?yearBook value at the end of each year

A computer system costs €120 000, has a useful life of 8 years and a salvage value of €12 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 6.

cost = €120 000life = 8salvage = €12 000year = 6

Find D (€)

Show hints
  1. Rate = 2/life = 25% per year.
  2. Each year: depreciation = rate × book value at the start of the year.
  3. book value at the start of year 6: €28 476.56.
Show the answer and the step-by-step solution

Depreciation spreads the cost of an asset over its useful life. Straight-line: (cost − salvage value)/life every year. Double-declining balance: 2/life times the book value at the start of each year, so the charge falls each year (salvage is not subtracted, but the book value never goes below it). Sum-of-the-years’-digits: (cost − salvage) × remaining life/(1 + 2 + … + n).

Rate

2/8 = 0.25

Year by year

year 1: 0.25·120 000.00 = €30 000.00
year 2: 0.25·90 000.00 = €22 500.00
year 3: 0.25·67 500.00 = €16 875.00
year 4: 0.25·50 625.00 = €12 656.25
year 5: 0.25·37 968.75 = €9 492.19
year 6: 0.25·28 476.56 = €7 119.14

Answer

D = €7 119.14

How practising works

  • “Practise this course” mixes problems from all its topics, like a real exam.
  • Every problem has new values, so you learn the method instead of an answer.
  • Stuck? Open a small hint first, and the full explanation only when you need it.
  • Mock exams are timed and have no hints, and you get your score and a full review at the end.

Calculators for this course

Depreciation calculator

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