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
Net working capital is:
- ANon-current assets minus long-term loans
- BRevenue minus operating expenses
- CCurrent assets minus current liabilities
- DTotal assets minus total liabilities
2.Financial accountingHard
A company changes its inventory method from weighted average to FIFO because it gives more relevant information. Under IAS 8, how is this applied?
- ABy recognising the whole effect as income this year
- BRetrospectively, restating comparative figures as if FIFO had always been used
- CProspectively, from the date of the change only
- DIt is not allowed to change inventory methods
3.DepreciationMedium
A delivery van costs €50 000, has a useful life of 6 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €50 000life = 6salvage = €2 500year = 4
D = €
4.DepreciationHard
A computer system costs €20 000, has a useful life of 5 years and a salvage value of €4 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €20 000life = 5salvage = €4 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · Current assets minus current liabilities
Why this is the answer
Working capital measures the short-term resources available for daily operations: inventory, receivables and cash minus short-term obligations.
Answer
C · Current assets minus current liabilities
2.Financial accounting
Answer: B · Retrospectively, restating comparative figures as if FIFO had always been used
Why this is the answer
Voluntary policy changes are applied retrospectively where practicable, so comparatives remain consistent. Changes in estimates, by contrast, are applied prospectively.
Answer
B · Retrospectively, restating comparative figures as if FIFO had always been used
3.Depreciation
Answer: D = 4938 €
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: 0.3333·50 000.00 = €16 666.67
year 2: 0.3333·33 333.33 = €11 111.11
year 3: 0.3333·22 222.22 = €7 407.41
year 4: 0.3333·14 814.81 = €4 938.27
Answer
D = €4 938.27
4.Depreciation
Answer: D = 4267 €
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 = 16 000·4/15 = €4 266.67
Answer
D = €4 266.67
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