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:
- ANon-current assets minus long-term loans
- BRevenue minus operating expenses
- CCurrent assets minus current liabilities
- DTotal assets minus total liabilities
2.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- AProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- BThe company must have repaid all its loans
- CThe company has very high earnings quality
- DDepreciation must have been too high
3.DepreciationMedium
A production line costs €24 000, has a useful life of 4 years and a salvage value of €3 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €24 000life = 4salvage = €3 500year = 2
D = €
4.DepreciationHard
A production line costs €24 000, has a useful life of 6 years and a salvage value of €2 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €24 000life = 6salvage = €2 500year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · 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
C · Current assets minus current liabilities
2.Financial accounting
Answer: A · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
Why this is the answer
A widening gap between profit and operating cash flow often signals working capital build-up or aggressive recognition, suggesting low earnings quality.
Answer
A · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 6000 €
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: 0.5·24 000.00 = €12 000.00
year 2: 0.5·12 000.00 = €6 000.00
Answer
D = €6 000.00
4.Depreciation
Answer: D = 5119 €
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 = 21 500·5/21 = €5 119.05
Answer
D = €5 119.05
ExamProblems · examproblems.com/courses/financial-accounting