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?
- A50 days
- B7.3 days
- C36.5 days
- D73 days
2.Financial accountingHard
An increase in accounts receivable during the year, in the indirect cash flow method, is:
- AAdded to profit
- BShown as an investing outflow
- CSubtracted from profit to get operating cash flow
- DNot relevant to cash flow
3.DepreciationMedium
A computer system costs €20 000, has a useful life of 8 years and a salvage value of €4 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €20 000life = 8salvage = €4 000year = 4
D = €
4.DepreciationHard
A delivery van costs €30 000, has a useful life of 10 years and a salvage value of €3 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €30 000life = 10salvage = €3 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · 50 days
Why this is the answer
€50,000 ÷ €365,000 × 365 = 50 days. This is the average time customers take to pay.
Answer
A · 50 days
2.Financial accounting
Answer: C · 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
C · Subtracted from profit to get operating cash flow
3.Depreciation
Answer: D = 2109 €
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
2/8 = 0.25
Year by year
year 1: 0.25·20 000.00 = €5 000.00
year 2: 0.25·15 000.00 = €3 750.00
year 3: 0.25·11 250.00 = €2 812.50
year 4: 0.25·8 437.50 = €2 109.38
Answer
D = €2 109.38
4.Depreciation
Answer: D = 3927 €
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 3
(10 − 3 + 1)/55 = 8/55
Depreciation
D = 27 000·8/55 = €3 927.27
Answer
D = €3 927.27
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