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
What is the key difference between absorption costing and marginal costing?
- AMarginal costing is required by IFRS for external reporting
- BAbsorption costing ignores variable costs
- CAbsorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
- DMarginal costing includes all overheads in inventory; absorption costing excludes them
2.Financial accountingHard
Operating profit is €200,000 and capital employed (equity plus non-current liabilities) is €1,000,000. What is ROCE?
- A5%
- B20%
- C2%
- D50%
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 2.
cost = €120 000life = 5salvage = €0year = 2
D = €
4.DepreciationHard
A computer system costs €100 000, has a useful life of 6 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €100 000life = 6salvage = €5 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: C · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
Why this is the answer
Under absorption costing each unit carries a share of fixed production overhead. Marginal costing values inventory at variable cost only and expenses fixed costs in the period.
Answer
C · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
2.Financial accounting
Answer: B · 20%
Why this is the answer
ROCE = €200,000 ÷ €1,000,000 = 20%. It measures returns on all long-term finance, so it can be compared with the cost of borrowing.
Answer
B · 20%
3.Depreciation
Answer: D = 28800 €
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
Answer
D = €28 800.00
4.Depreciation
Answer: D = 13571 €
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 4
(6 − 4 + 1)/21 = 3/21
Depreciation
D = 95 000·3/21 = €13 571.43
Answer
D = €13 571.43
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