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
Operating profit is €120,000 and interest expense is €30,000. What is interest cover?
- A90,000 times
- B3 times
- C4 times
- D0.25 times
2.Financial accountingHard
A firm has a net profit margin of 5%, asset turnover of 2 and an equity multiplier (assets ÷ equity) of 1.5. Using the DuPont analysis, what is ROE?
- A15%
- B8.5%
- C7.5%
- D10%
3.DepreciationMedium
A machine costs €60 000, has a useful life of 6 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 3.
cost = €60 000life = 6salvage = €3 000year = 3
D = €
4.DepreciationHard
A delivery van costs €30 000, has a useful life of 4 years and a salvage value of €1 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €1 500year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · 4 times
Why this is the answer
€120,000 ÷ €30,000 = 4. The company earns its interest four times over; low cover signals a risk of not meeting interest payments.
Answer
C · 4 times
2.Financial accounting
Answer: A · 15%
Why this is the answer
ROE = 5% × 2 × 1.5 = 15%. DuPont shows whether returns come from profitability, asset efficiency or leverage.
Answer
A · 15%
3.Depreciation
Answer: D = 8889 €
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: 0.3333·60 000.00 = €20 000.00
year 2: 0.3333·40 000.00 = €13 333.33
year 3: 0.3333·26 666.67 = €8 888.89
Answer
D = €8 888.89
4.Depreciation
Answer: D = 8550 €
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 = 28 500·3/10 = €8 550.00
Answer
D = €8 550.00
ExamProblems · examproblems.com/courses/financial-accounting