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
Why can a profitable company run out of cash?
- AProfit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
- BProfit always equals cash
- CCash is not recorded in accounting
- DProfitable companies never pay taxes
2.Financial accountingHard
Under IFRS 15, revenue is recognised:
- AOnly when cash is received
- BWhen the contract is signed
- CWhen (or as) the entity satisfies a performance obligation by transferring control to the customer
- DAt the end of the financial year
3.DepreciationMedium
A production line costs €100 000, has a useful life of 8 years and a salvage value of €15 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €100 000life = 8salvage = €15 000year = 2
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 4 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €120 000life = 4salvage = €12 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
Why this is the answer
Profit is measured on an accrual basis; growth can tie up cash in inventory and receivables, so cash flow can be negative despite profits.
Answer
A · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
2.Financial accounting
Answer: C · When (or as) the entity satisfies a performance obligation by transferring control to the customer
Why this is the answer
The steps: identify the contract, identify performance obligations, determine the price, allocate it, and recognise revenue as each obligation is satisfied.
Answer
C · When (or as) the entity satisfies a performance obligation by transferring control to the customer
3.Depreciation
Answer: D = 18750 €
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: 0.25·100 000.00 = €25 000.00
year 2: 0.25·75 000.00 = €18 750.00
Answer
D = €18 750.00
4.Depreciation
Answer: D = 32400 €
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 = 108 000·3/10 = €32 400.00
Answer
D = €32 400.00
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