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
Current assets are €300,000, including inventory of €100,000. Current liabilities are €200,000. What is the quick (acid-test) ratio?
- A1.5
- B1.0
- C0.5
- D2.0
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?
- A7.5%
- B15%
- C8.5%
- D10%
3.DepreciationMedium
A machine costs €80 000, has a useful life of 4 years and a salvage value of €16 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €80 000life = 4salvage = €16 000year = 2
D = €
4.DepreciationHard
A computer system costs €80 000, has a useful life of 6 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €80 000life = 6salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · 1.0
Why this is the answer
Quick ratio = (current assets − inventory) ÷ current liabilities = €200,000 ÷ €200,000 = 1.0. Inventory is excluded because it may be slow to turn into cash.
Answer
B · 1.0
2.Financial accounting
Answer: B · 15%
Why this is the answer
ROE = 5% × 2 × 1.5 = 15%. DuPont shows whether returns come from profitability, asset efficiency or leverage.
Answer
B · 15%
3.Depreciation
Answer: D = 20000 €
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: 0.5·80 000.00 = €40 000.00
year 2: 0.5·40 000.00 = €20 000.00
Answer
D = €20 000.00
4.Depreciation
Answer: D = 19048 €
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
(6 − 2 + 1)/21 = 5/21
Depreciation
D = 80 000·5/21 = €19 047.62
Answer
D = €19 047.62
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