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 product sells for €40 and has a variable cost of €30. What is its contribution-to-sales (C/S) ratio?
- A10%
- B33%
- C75%
- D25%
2.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- AProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- BDepreciation must have been too high
- CThe company has very high earnings quality
- DThe company must have repaid all its loans
3.DepreciationMedium
A delivery van costs €30 000, has a useful life of 5 years and a salvage value of €6 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €30 000life = 5salvage = €6 000year = 3
D = €
4.DepreciationHard
A machine costs €80 000, has a useful life of 10 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €80 000life = 10salvage = €12 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: D · 25%
Why this is the answer
Contribution = €10. C/S ratio = €10 ÷ €40 = 25%. Fixed costs ÷ C/S ratio gives break-even revenue.
Answer
D · 25%
2.Financial accounting
Answer: A · 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
A · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 4320 €
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: 0.4·30 000.00 = €12 000.00
year 2: 0.4·18 000.00 = €7 200.00
year 3: 0.4·10 800.00 = €4 320.00
Answer
D = €4 320.00
4.Depreciation
Answer: D = 9891 €
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 3
(10 − 3 + 1)/55 = 8/55
Depreciation
D = 68 000·8/55 = €9 890.91
Answer
D = €9 890.91
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