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
Operating profit is €120,000 and interest expense is €30,000. What is interest cover?
- A4 times
- B90,000 times
- C3 times
- D0.25 times
2.Financial accountingHard
An increase in accounts receivable during the year, in the indirect cash flow method, is:
- AShown as an investing outflow
- BNot relevant to cash flow
- CSubtracted from profit to get operating cash flow
- DAdded to profit
3.DepreciationMedium
A computer system costs €120 000, has a useful life of 5 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 3.
cost = €120 000life = 5salvage = €0year = 3
D = €
4.DepreciationHard
A computer system costs €45 000, has a useful life of 6 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €45 000life = 6salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · 4 times
Why this is the answer
€120,000 ÷ €30,000 = 4. The company earns its interest four times over; low cover signals a risk of not meeting interest payments.
Answer
A · 4 times
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 = 17280 €
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: 0.4·120 000.00 = €48 000.00
year 2: 0.4·72 000.00 = €28 800.00
year 3: 0.4·43 200.00 = €17 280.00
Answer
D = €17 280.00
4.Depreciation
Answer: D = 10714 €
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
(6 − 2 + 1)/21 = 5/21
Depreciation
D = 45 000·5/21 = €10 714.29
Answer
D = €10 714.29
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