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
A shop buys 100 units at €10, then 100 units at €12, and then sells 150 units. What is cost of sales using FIFO?
- A€1,700
- B€1,600
- C€1,650
- D€1,500
2.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- AThe company must have repaid all its loans
- BThe company has very high earnings quality
- CProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- DDepreciation must have been too high
3.DepreciationMedium
A delivery van costs €24 000, has a useful life of 5 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €24 000life = 5salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €60 000, has a useful life of 10 years and a salvage value of €9 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 7.
cost = €60 000life = 10salvage = €9 000year = 7
D = €
3Solutions
1.Financial accounting
Answer: B · €1,600
Why this is the answer
FIFO: 100 × €10 + 50 × €12 = €1,600. The 50 units left are valued at the latest cost of €12.
Answer
B · €1,600
2.Financial accounting
Answer: C · 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
C · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 5760 €
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: 0.4·24 000.00 = €9 600.00
year 2: 0.4·14 400.00 = €5 760.00
Answer
D = €5 760.00
4.Depreciation
Answer: D = 3709 €
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 7
(10 − 7 + 1)/55 = 4/55
Depreciation
D = 51 000·4/55 = €3 709.09
Answer
D = €3 709.09
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