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
Which depreciation method charges the same amount every year?
- ASum-of-the-years'-digits
- BReducing balance
- CStraight-line
- DUnits of production
2.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- AThe company must have repaid all its loans
- BThe company has very high earnings quality
- CProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- DDepreciation must have been too high
3.DepreciationMedium
A machine costs €60 000, has a useful life of 6 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 = €60 000life = 6salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €20 000, has a useful life of 5 years and a salvage value of €1 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €20 000life = 5salvage = €1 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · Straight-line
Why this is the answer
Straight-line spreads the depreciable amount evenly. Reducing balance charges more in early years; units of production follows actual use.
Answer
C · Straight-line
2.Financial accounting
Answer: C · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
Why this is the answer
A widening gap between profit and operating cash flow often signals working capital build-up or aggressive recognition, suggesting low earnings quality.
Answer
C · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 13333 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·60 000.00 = €20 000.00
year 2: 0.3333·40 000.00 = €13 333.33
Answer
D = €13 333.33
4.Depreciation
Answer: D = 5067 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 19 000·4/15 = €5 066.67
Answer
D = €5 066.67
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