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
A company increases its allowance for doubtful receivables. What is the effect?
- ACash decreases immediately
- BRevenue increases and gross receivables rise by the same amount
- CAn expense is recognised and net receivables fall
- DOnly the notes change; no figures move
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
- BDepreciation must have been too high
- CThe company has very high earnings quality
- DProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.DepreciationMedium
A computer system costs €50 000, has a useful life of 4 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 = €50 000life = 4salvage = €0year = 2
D = €
4.DepreciationHard
A machine costs €60 000, has a useful life of 4 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €60 000life = 4salvage = €6 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · An expense is recognised and net receivables fall
Why this is the answer
The increase is charged to profit, and the allowance is deducted from gross receivables, so the balance sheet shows the amount expected to be collected.
Answer
C · An expense is recognised and net receivables fall
2.Financial accounting
Answer: D · 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
D · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 12500 €
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
2/4 = 0.5
Year by year
year 1: 0.5·50 000.00 = €25 000.00
year 2: 0.5·25 000.00 = €12 500.00
Answer
D = €12 500.00
4.Depreciation
Answer: D = 16200 €
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
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 54 000·3/10 = €16 200.00
Answer
D = €16 200.00
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