CH 6 Flashcards
Define Time value of money
a. Relationship between time and money. Meaning, a Dollar received today is worth more than a dollar promised at some time in the future because of the opportunity to invent today’s dollar and receive interest on the investment
Why is timing an important feature to investment
a. Opportunity to invest today’s dollar and receive interest on the investment, and it helps to identify the concept of present value
What are FMV based on
a. Market prices in active markets ( level 1)
b. Expected cash flows, most subjective ( level 3)
What are present value based accounting measures
a. Notes
b. Leases
c. Pensions and other postretirement benefits
d. Long term assets
e. Stock based compensation
f. Business combinations
g. Disclosures
h. Environmental Liabilities
Define interests
a. Payment for the use of money
Define principal
a. Cash received or repaid over and above the amount lent or borrowed
How is an interest rate determined?
a. Higher credit risk leads to higher interest rate
What are variables in interest computation
a. Principal
b. Interest rate
c. Time
What are three relationships of variables in interest computation
a. The larger the principal amount, the larger the dollar amount of interest
b. The higher the interest rate, the larger the dollar amount of interest
c. The longer the time period, the larger the dollar amount of interest
Define simple interest
a. Interest on principal only, regardless of interest that may have accrued in past periods( Compounded)
Define Compound interest
a. Interest that accrues on both the principal and the interest earned in past periods( interest isn’t either withdrawn or paid out)
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