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
Net working capital is:
- ANon-current assets minus long-term loans
- BRevenue minus operating expenses
- CTotal assets minus total liabilities
- DCurrent assets minus current liabilities
2.Financial accountingHard
Machine hours are scarce. Product X earns €20 contribution and needs 4 hours; product Y earns €15 and needs 2 hours. Which should be made first?
- AX, because it earns more contribution per unit
- BEither, because the total contribution is the same
- CX, because it uses more machine time
- DY, because it earns €7.50 per hour versus €5 for X
3.DepreciationMedium
A computer system costs €30 000, has a useful life of 10 years and a salvage value of €4 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 10salvage = €4 500year = 2
D = €
4.DepreciationHard
A delivery van costs €100 000, has a useful life of 4 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €100 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · Current assets minus current liabilities
Why this is the answer
Working capital measures the short-term resources available for daily operations: inventory, receivables and cash minus short-term obligations.
Answer
D · Current assets minus current liabilities
2.Financial accounting
Answer: D · Y, because it earns €7.50 per hour versus €5 for X
Why this is the answer
X earns €20 ÷ 4 = €5 per hour, Y earns €15 ÷ 2 = €7.50 per hour. With a scarce resource, maximise contribution per scarce hour.
Answer
D · Y, because it earns €7.50 per hour versus €5 for X
3.Depreciation
Answer: D = 4800 €
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
2/10 = 0.2
Year by year
year 1: 0.2·30 000.00 = €6 000.00
year 2: 0.2·24 000.00 = €4 800.00
Answer
D = €4 800.00
4.Depreciation
Answer: D = 30000 €
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 = 100 000·3/10 = €30 000.00
Answer
D = €30 000.00
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