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
Current assets are €300,000 and current liabilities are €150,000. What is the current ratio?
- A0.5
- B2.0
- C1.5
- D4.5
2.Financial accountingHard
An increase in accounts receivable during the year, in the indirect cash flow method, is:
- AAdded to profit
- BSubtracted from profit to get operating cash flow
- CShown as an investing outflow
- DNot relevant to cash flow
3.DepreciationMedium
A computer system costs €45 000, 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 6.
cost = €45 000life = 10salvage = €0year = 6
D = €
4.DepreciationHard
A machine costs €80 000, has a useful life of 10 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 8.
cost = €80 000life = 10salvage = €12 000year = 8
D = €
3Solutions
1.Financial accounting
Answer: B · 2.0
Why this is the answer
€300,000 ÷ €150,000 = 2.0, so current assets cover short-term obligations twice.
Answer
B · 2.0
2.Financial accounting
Answer: B · Subtracted from profit to get operating cash flow
Why this is the answer
Higher receivables mean some revenue was not received in cash, so the increase is deducted.
Answer
B · Subtracted from profit to get operating cash flow
3.Depreciation
Answer: D = 2949 €
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: 0.2·45 000.00 = €9 000.00
year 2: 0.2·36 000.00 = €7 200.00
year 3: 0.2·28 800.00 = €5 760.00
year 4: 0.2·23 040.00 = €4 608.00
year 5: 0.2·18 432.00 = €3 686.40
year 6: 0.2·14 745.60 = €2 949.12
Answer
D = €2 949.12
4.Depreciation
Answer: D = 3709 €
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 8
(10 − 8 + 1)/55 = 3/55
Depreciation
D = 68 000·3/55 = €3 709.09
Answer
D = €3 709.09
ExamProblems · examproblems.com/courses/financial-accounting