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
Net working capital is:
- ACurrent assets minus current liabilities
- BRevenue minus operating expenses
- CTotal assets minus total liabilities
- DNon-current assets minus long-term loans
2.Financial accountingHard
A company borrows at 5% interest to invest in assets that earn 12%. What is the likely effect on return on equity?
- AROE falls, because interest is an expense
- BROE rises, but financial risk also increases
- CROE rises and financial risk falls
- DROE stays the same, because debt is not equity
3.DepreciationMedium
A production line costs €80 000, has a useful life of 10 years and a salvage value of €8 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 7.
cost = €80 000life = 10salvage = €8 000year = 7
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 8 years and a salvage value of €18 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €120 000life = 8salvage = €18 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: A · Current assets minus current liabilities
Why this is the answer
Working capital measures the short-term resources available for daily operations: inventory, receivables and cash minus short-term obligations.
Answer
A · Current assets minus current liabilities
2.Financial accounting
Answer: B · ROE rises, but financial risk also increases
Why this is the answer
Positive financial leverage: assets earn more than the debt costs, so profit per euro of equity rises. If returns drop below 5%, leverage works against shareholders.
Answer
B · ROE rises, but financial risk also increases
3.Depreciation
Answer: D = 4194 €
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
2/10 = 0.2
Year by year
year 1: 0.2·80 000.00 = €16 000.00
year 2: 0.2·64 000.00 = €12 800.00
year 3: 0.2·51 200.00 = €10 240.00
year 4: 0.2·40 960.00 = €8 192.00
year 5: 0.2·32 768.00 = €6 553.60
year 6: 0.2·26 214.40 = €5 242.88
year 7: 0.2·20 971.52 = €4 194.30
Answer
D = €4 194.30
4.Depreciation
Answer: D = 8500 €
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 6
(8 − 6 + 1)/36 = 3/36
Depreciation
D = 102 000·3/36 = €8 500.00
Answer
D = €8 500.00
ExamProblems · examproblems.com/courses/financial-accounting