Ch 6 Flashcards
Present value
Amount needed to invest now to produce a known
future value
Discounting
Time value of money
Relationship btw time and money
A dollar received today is worth more than in the future
Name 8 present value based accounting measurements?
1 notes 2 leases 3 pensions/post retirement benefits 4 long-term assets 5 stock based compensation 6 business combinations 7 disclosures 8 environmental liabilities
Notes, present value based accounting measurements?
Valuing non current receivables and payables
That carry no interest rate or lower than market interest rate
Leases, present value based accounting measurements?
Valuing assets and obligations capitalized under
Longterm leases
Measuring amount of lease payments
+ annual leasehold amortization
Pensions and post retirement benefits, present value based accounting measurements?
Measuring service cost components of employers’
Post retirement benefits expense
+ post retirement benefits obligations
Long-term assets, present value based accounting measurements?
Evaluating alternative long term investments by discounting
Future cash flows
Determining value of assets acquired under deferred
Payment contracts
Measuring impairments of assets
Stock based compensation, present value based accounting measurements?
Determining fair value of employee services in
Compensatory stock-option plans
Business combinations, present value based accounting measurements: 5 things Determining the value of…
receivables, payables, liabilities, Accruals, commitments acquired (or assumed in purchase)
Disclosures, present value based accounting measurements?
Measuring value of future cash flows from oil and gas
Reserves for disclosure in supplementary info
Environmental liabilities, present value based accounting measurements?
Determining fair value of future obligations for
Asset retirements
Interest
Payments for use of money
Excess cash received or repaid over the amount lent
Principal
Amount of money lent or borrowed
Or amount of money invested
3 variables in interest computation?
Principal
Interest rate
time
Interest rate
Percentage of outstanding principal
Simple interest define, equation?
Return on principal for 1 time period
Interest = p x i x n
Where p= principal,
i = rate of interest single period
n = # of periods
Compound interest
Principal and any interest earned that hasn’t been paid
Or withdrawn
Interest earned to date on 2 or more time periods
4 Fundamental Variables for time value of money?
1 rate of interest
2 # time periods
3 future value
4 present value
Rate of interest, fundamental variables?
Rate unless otherwise stated is annual rate
Must be adjusted to reflect length of compounding
Period if less than 1 year
Number of time periods, fundamental variables?
Number of compounding periods
may be equal to or less than 1 year
Present value, fundamental variables?
Value now of future sum/sums discounted
assuming compound interest
Time diagram
Depicts relationship between 4 fundamental variables: Rate of interest # of periods Future value Present value
Single sum problems?
Computing the future value or present value of
A one time amount of money over a # of periods
Present value equation and example?
PV = FV (PVFni)
PVFni = present value factor for n periods at i interest
Ex $50,000 = $84,253 (1/((1 + .11)^5)
3 characteristics of defining an annuity?
1 periodic payments (rents) or receipts of same amount
2 same length interval between such rents
3 compounding interest once each interval
Ordinary annuity, annuity due?
Ordinary annuity- rents occur at end of each period
Annuity due- rents occur at beginning of each period
Present value of an ordinary annuity equation?
PVF-OAn,i = [1 - 1/(1 + i)^n]/i
Present value of an annuity due factor equation?
Present value of annuity due factor =
Present value of ordinary annuity factor x (1 + i)
Ex. Present value of ordinary annuity over 4 periods at 11%= 3.10
3.10 x (1.11) = 3.44 = PV of annuity due
Deferred annuity, ex. Ordinary annuity vs annuity due?
Does not begin to produce rents until 2 or more periods
Annuity where rents begin after specified # of periods
Ex ordinary annuity of 6 annual rents deferred 4 yrs
Means first of 6 rents occur at end of 5th year
Annuity due 6 annual rents deferred 4 yrs
Means first of 6 rents occur at beginning of 5 th year
Two cash flows used in valuating a Longterm bond?
1 periodic interest payments during life of bond
2 principal paid at maturity
Effective interest method of amortization
1 company issuing bond first computes bond interest
expense
2 company determines the bond discount or premium
Amortization by comparing the interest expense
With interest to be paid
