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
Which inventory valuation method assumes the oldest goods are sold first?
- ASpecific identification of each item
- BFIFO (first in, first out)
- CWeighted average cost
- DLIFO (last in, first out)
2.Financial accountingHard
A company switches to a depreciation method that gives higher charges. Ignoring tax, what happens to cash flow?
- ACash flow and profit both rise
- BCash flow is unchanged, although profit falls
- CCash flow falls by the amount of the extra depreciation
- DCash flow rises by the extra depreciation
3.DepreciationMedium
A machine costs €30 000, has a useful life of 4 years and a salvage value of €3 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €3 000year = 2
D = €
4.DepreciationHard
A machine costs €120 000, has a useful life of 4 years and a salvage value of €18 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €120 000life = 4salvage = €18 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · FIFO (first in, first out)
Why this is the answer
Under FIFO, cost of sales uses the oldest costs and closing inventory reflects recent costs. IFRS does not allow LIFO.
Answer
B · FIFO (first in, first out)
2.Financial accounting
Answer: B · Cash flow is unchanged, although profit falls
Why this is the answer
Depreciation allocates a cost already paid. Changing the method changes reported profit, but no extra cash leaves the business (tax effects aside).
Answer
B · Cash flow is unchanged, although profit falls
3.Depreciation
Answer: D = 7500 €
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: 0.5·30 000.00 = €15 000.00
year 2: 0.5·15 000.00 = €7 500.00
Answer
D = €7 500.00
4.Depreciation
Answer: D = 30600 €
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 = 102 000·3/10 = €30 600.00
Answer
D = €30 600.00
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