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
Revenue is €200,000 and cost of sales is €140,000. What is the gross profit margin?
- A43%
- B30%
- C70%
- D60%
2.Financial accountingHard
A company's debt-to-equity ratio rises sharply. What does this usually indicate?
- AHigher financial risk because the company relies more on borrowed money
- BHigher profitability
- CThat shareholders invested more money
- DBetter liquidity in the short term
3.DepreciationMedium
A production line costs €60 000, 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 4.
cost = €60 000life = 8salvage = €12 000year = 4
D = €
4.DepreciationHard
A machine costs €100 000, has a useful life of 4 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €100 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · 30%
Why this is the answer
Gross profit = €60,000. Margin = €60,000 ÷ €200,000 = 30%.
Answer
B · 30%
2.Financial accounting
Answer: A · Higher financial risk because the company relies more on borrowed money
Why this is the answer
A higher ratio means more leverage: interest and repayments must be met whatever the results, so financial risk rises, although returns to shareholders may also rise.
Answer
A · Higher financial risk because the company relies more on borrowed money
3.Depreciation
Answer: D = 6328 €
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: 0.25·60 000.00 = €15 000.00
year 2: 0.25·45 000.00 = €11 250.00
year 3: 0.25·33 750.00 = €8 437.50
year 4: 0.25·25 312.50 = €6 328.13
Answer
D = €6 328.13
4.Depreciation
Answer: D = 30000 €
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 = 100 000·3/10 = €30 000.00
Answer
D = €30 000.00
ExamProblems · examproblems.com/courses/financial-accounting