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
Why can a profitable company run out of cash?
- AProfit always equals cash
- BProfitable companies never pay taxes
- CProfit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
- DCash is not recorded in accounting
2.Financial accountingHard
Goodwill arises in a business combination when:
- AAssets are revalued upwards
- BThe consideration paid exceeds the fair value of identifiable net assets acquired
- CThe acquired company makes a loss
- DA company has a good reputation
3.DepreciationMedium
A computer system costs €12 000, has a useful life of 10 years and a salvage value of €2 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 5.
cost = €12 000life = 10salvage = €2 000year = 5
D = €
4.DepreciationHard
A machine costs €100 000, has a useful life of 4 years and a salvage value of €15 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €100 000life = 4salvage = €15 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
Why this is the answer
Profit is measured on an accrual basis; growth can tie up cash in inventory and receivables, so cash flow can be negative despite profits.
Answer
C · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
2.Financial accounting
Answer: B · The consideration paid exceeds the fair value of identifiable net assets acquired
Why this is the answer
Goodwill = consideration − fair value of identifiable net assets. Under IFRS it is not amortised but tested for impairment annually.
Answer
B · The consideration paid exceeds the fair value of identifiable net assets acquired
3.Depreciation
Answer: D = 983 €
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: 0.2·12 000.00 = €2 400.00
year 2: 0.2·9 600.00 = €1 920.00
year 3: 0.2·7 680.00 = €1 536.00
year 4: 0.2·6 144.00 = €1 228.80
year 5: 0.2·4 915.20 = €983.04
Answer
D = €983.04
4.Depreciation
Answer: D = 25500 €
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 = 85 000·3/10 = €25 500.00
Answer
D = €25 500.00
ExamProblems · examproblems.com/courses/financial-accounting