Ch 6

Question 0

Present value

Answer 0

Amount needed to invest now to produce a known
future value

Discounting

Question 1

Time value of money

Answer 1

Relationship btw time and money

A dollar received today is worth more than in the future

Question 2

Name 8 present value based accounting measurements?

Answer 2

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

Question 3

Notes, present value based accounting measurements?

Answer 3

Valuing non current receivables and payables

That carry no interest rate or lower than market interest rate

Question 4

Leases, present value based accounting measurements?

Answer 4

Valuing assets and obligations capitalized under
Longterm leases

Measuring amount of lease payments
+ annual leasehold amortization

Question 5

Pensions and post retirement benefits, present value based accounting measurements?

Answer 5

Measuring service cost components of employers’
Post retirement benefits expense
+ post retirement benefits obligations

Question 6

Long-term assets, present value based accounting measurements?

Answer 6

Evaluating alternative long term investments by discounting
Future cash flows

Determining value of assets acquired under deferred
Payment contracts

Measuring impairments of assets

Question 7

Stock based compensation, present value based accounting measurements?

Answer 7

Determining fair value of employee services in

Compensatory stock-option plans

Question 8

Business combinations, present value based accounting measurements: 5 things Determining the value of…

Answer 8

receivables,
 payables, 
liabilities,
Accruals,
commitments acquired (or assumed in purchase)

Question 9

Disclosures, present value based accounting measurements?

Answer 9

Measuring value of future cash flows from oil and gas

Reserves for disclosure in supplementary info

Question 10

Environmental liabilities, present value based accounting measurements?

Answer 10

Determining fair value of future obligations for

Asset retirements

Question 11

Interest

Answer 11

Payments for use of money

Excess cash received or repaid over the amount lent

Question 12

Principal

Answer 12

Amount of money lent or borrowed

Or amount of money invested

Question 13

3 variables in interest computation?

Answer 13

Principal
Interest rate
time

Question 14

Interest rate

Answer 14

Percentage of outstanding principal

Question 15

Simple interest define, equation?

Answer 15

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

Question 16

Compound interest

Answer 16

Principal and any interest earned that hasn’t been paid
Or withdrawn

Interest earned to date on 2 or more time periods

Question 17

4 Fundamental Variables for time value of money?

Answer 17

1 rate of interest
2 # time periods
3 future value
4 present value

Question 18

Rate of interest, fundamental variables?

Answer 18

Rate unless otherwise stated is annual rate

Must be adjusted to reflect length of compounding
Period if less than 1 year

Question 19

Number of time periods, fundamental variables?

Answer 19

Number of compounding periods

may be equal to or less than 1 year

Question 20

Present value, fundamental variables?

Answer 20

Value now of future sum/sums discounted

assuming compound interest

Question 21

Time diagram

Answer 21

Depicts relationship between 4 fundamental variables:
Rate of interest
# of periods
Future value
Present value

Question 22

Single sum problems?

Answer 22

Computing the future value or present value of

A one time amount of money over a # of periods

Question 23

Present value equation and example?

Answer 23

PV = FV (PVFni)

PVFni = present value factor for n periods at i interest

Ex $50,000 = $84,253 (1/((1 + .11)^5)

Question 24

3 characteristics of defining an annuity?

Answer 24

1 periodic payments (rents) or receipts of same amount
2 same length interval between such rents
3 compounding interest once each interval

Question 25

Ordinary annuity, annuity due?

Answer 25

Ordinary annuity- rents occur at end of each period

Annuity due- rents occur at beginning of each period

Question 26

Present value of an ordinary annuity equation?

Answer 26

PVF-OAn,i = [1 - 1/(1 + i)^n]/i

Question 27

Present value of an annuity due factor equation?

Answer 27

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

Question 28

Deferred annuity, ex. Ordinary annuity vs annuity due?

Answer 28

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

Question 29

Two cash flows used in valuating a Longterm bond?

Answer 29

1 periodic interest payments during life of bond

2 principal paid at maturity

Question 30

Effective interest method of amortization

Answer 30

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