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:
- ATotal assets minus total liabilities
- BRevenue minus operating expenses
- CNon-current assets minus long-term loans
- DCurrent assets minus current liabilities
2.Financial accountingHard
A firm has spent €50,000 on market research for a new product and must decide whether to launch it. How should the €50,000 be treated in the decision?
- ASpread over the product's expected life
- BIgnored, because it is a sunk cost
- CAdded to the launch cost
- DDeducted from expected sales
3.DepreciationMedium
A delivery van costs €12 000, has a useful life of 6 years and a salvage value of €500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €12 000life = 6salvage = €500year = 3
D = €
4.DepreciationHard
A computer system costs €24 000, has a useful life of 10 years and a salvage value of €2 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €24 000life = 10salvage = €2 500year = 6
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: B · Ignored, because it is a sunk cost
Why this is the answer
The research money is spent whichever choice is made, so it is irrelevant. Only future incremental cash flows from launching should be compared.
Answer
B · Ignored, because it is a sunk cost
3.Depreciation
Answer: D = 1778 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·12 000.00 = €4 000.00
year 2: 0.3333·8 000.00 = €2 666.67
year 3: 0.3333·5 333.33 = €1 777.78
Answer
D = €1 777.78
4.Depreciation
Answer: D = 1955 €
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 6
(10 − 6 + 1)/55 = 5/55
Depreciation
D = 21 500·5/55 = €1 954.55
Answer
D = €1 954.55
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