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
Cost of sales is €600,000 and average inventory is €100,000. What is the inventory turnover?
- A6 times a year
- B0.17 times a year
- C16 times a year
- D60 times a year
2.Financial accountingHard
A firm with spare capacity gets a one-off order at €35 per unit. Variable cost is €30 and full cost including fixed overhead is €42. Assuming no other effects, should it accept?
- AYes, but only if the price exceeds €42
- BNo, the order makes a €7 loss per unit
- CNo, the price is below full cost
- DYes, each unit adds €5 contribution
3.DepreciationMedium
A production line costs €100 000, has a useful life of 4 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 = €100 000life = 4salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €60 000, has a useful life of 4 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €60 000life = 4salvage = €6 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · 6 times a year
Why this is the answer
€600,000 ÷ €100,000 = 6, so inventory is replaced about every 61 days (365 ÷ 6).
Answer
A · 6 times a year
2.Financial accounting
Answer: D · Yes, each unit adds €5 contribution
Why this is the answer
Fixed costs do not change, so the order adds €35 − €30 = €5 per unit to profit. Risks such as upsetting regular customers should still be considered.
Answer
D · Yes, each unit adds €5 contribution
3.Depreciation
Answer: D = 25000 €
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
2/4 = 0.5
Year by year
year 1: 0.5·100 000.00 = €50 000.00
year 2: 0.5·50 000.00 = €25 000.00
Answer
D = €25 000.00
4.Depreciation
Answer: D = 16200 €
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 = 54 000·3/10 = €16 200.00
Answer
D = €16 200.00
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