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
Why can a profitable company run out of cash?
- AProfit always equals cash
- BProfitable companies never pay taxes
- CCash is not recorded in accounting
- DProfit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
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?
- AEither, because the total contribution is the same
- BY, because it earns €7.50 per hour versus €5 for X
- CX, because it earns more contribution per unit
- DX, because it uses more machine time
3.DepreciationMedium
A computer system costs €12 000, has a useful life of 5 years and a salvage value of €2 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €12 000life = 5salvage = €2 000year = 2
D = €
4.DepreciationHard
A machine costs €45 000, 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 = €45 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
Why this is the answer
Profit is measured on an accrual basis; growth can tie up cash in inventory and receivables, so cash flow can be negative despite profits.
Answer
D · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
2.Financial accounting
Answer: B · 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
B · Y, because it earns €7.50 per hour versus €5 for X
3.Depreciation
Answer: D = 2880 €
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: 0.4·12 000.00 = €4 800.00
year 2: 0.4·7 200.00 = €2 880.00
Answer
D = €2 880.00
4.Depreciation
Answer: D = 13500 €
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 = 45 000·3/10 = €13 500.00
Answer
D = €13 500.00
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