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
Trade receivables are €50,000 and annual credit sales are €365,000. What are the receivable days?
- A36.5 days
- B7.3 days
- C50 days
- D73 days
2.Financial accountingHard
A company borrows at 5% interest to invest in assets that earn 12%. What is the likely effect on return on equity?
- AROE stays the same, because debt is not equity
- BROE rises, but financial risk also increases
- CROE rises and financial risk falls
- DROE falls, because interest is an expense
3.DepreciationMedium
A computer system costs €100 000, has a useful life of 5 years and a salvage value of €20 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €100 000life = 5salvage = €20 000year = 3
D = €
4.DepreciationHard
A production line costs €24 000, has a useful life of 8 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €24 000life = 8salvage = €5 000year = 5
D = €
3Solutions
1.Financial accounting
Answer: C · 50 days
Why this is the answer
€50,000 ÷ €365,000 × 365 = 50 days. This is the average time customers take to pay.
Answer
C · 50 days
2.Financial accounting
Answer: B · ROE rises, but financial risk also increases
Why this is the answer
Positive financial leverage: assets earn more than the debt costs, so profit per euro of equity rises. If returns drop below 5%, leverage works against shareholders.
Answer
B · ROE rises, but financial risk also increases
3.Depreciation
Answer: D = 14400 €
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
2/5 = 0.4
Year by year
year 1: 0.4·100 000.00 = €40 000.00
year 2: 0.4·60 000.00 = €24 000.00
year 3: 0.4·36 000.00 = €14 400.00
Answer
D = €14 400.00
4.Depreciation
Answer: D = 2111 €
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 5
(8 − 5 + 1)/36 = 4/36
Depreciation
D = 19 000·4/36 = €2 111.11
Answer
D = €2 111.11
ExamProblems · examproblems.com/courses/financial-accounting