Depreciation
- Straight-line
- (cost − salvage)/life
- Double-declining balance
- 2/life × book value at the start of the year
- Sum of the years’ digits
- (cost − salvage) × remaining life/SYD
- SYD
- n(n + 1)/2
- Book value
- cost − accumulated depreciation
Financial Accounting: cram pack
Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.
1Formulas and methods
2Practice problems
1.Financial accountingMedium
Cost of sales is €600,000 and average inventory is €100,000. What is the inventory turnover?
- A60 times a year
- B0.17 times a year
- C6 times a year
- D16 times a year
2.Financial accountingHard
In the indirect method of the cash flow statement, depreciation is:
- AShown in financing activities
- BAdded back to net profit because it is a non-cash expense
- CIgnored completely
- DSubtracted from net profit
3.DepreciationMedium
A delivery van costs €50 000, has a useful life of 10 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €50 000life = 10salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €50 000, has a useful life of 4 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €50 000life = 4salvage = €5 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · 6 times a year
Why this is the answer
€600,000 ÷ €100,000 = 6, so inventory is replaced about every 61 days (365 ÷ 6).
Answer
C · 6 times a year
2.Financial accounting
Answer: B · Added back to net profit because it is a non-cash expense
Why this is the answer
Starting from profit, non-cash charges like depreciation are added back, and changes in working capital are adjusted.
Answer
B · Added back to net profit because it is a non-cash expense
3.Depreciation
Answer: D = 8000 €
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
2/10 = 0.2
Year by year
year 1: 0.2·50 000.00 = €10 000.00
year 2: 0.2·40 000.00 = €8 000.00
Answer
D = €8 000.00
4.Depreciation
Answer: D = 13500 €
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).
Fraction for year 2
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 45 000·3/10 = €13 500.00
Answer
D = €13 500.00
ExamProblems · examproblems.com/courses/financial-accounting