Chapter 6

Question 1

Time value of money concepts are useful in __________.

Answer 1

valuing several assets and liabilities

Question 2

What is interest?

Answer 2

Interest is the amount of money paid or received in excess of the amount borrowed or lent.

Question 3

What is compound interest?

Answer 3

includes interest not only on the initial investment but also on the accumulated interest in previous periods.

Question 4

Interest rates are typically stated as __________.

Answer 4

annual rates

Question 5

What is the effective interest rate?

Answer 5

rate at which money actually will grow during a full year

Question 6

What is the future value of a single amount?

Answer 6

the amount of money that a dollar will grow to at some point in the future

FV = I(1+i)^n
I = amount invested at the beg. of the period
i = interest rate
n = # of compounding periods

Question 7

What is the present value of a single amount?

Answer 7

is today’s equivalent to a particular amount in the future

PV = FV/(1+i)^n

Question 8

The calculation of future value requires the __________, while the calculation of present value requires the __________.

Answer 8

addition of interest

removal of interest

Question 9

Accountants use _____ calculations much more frequently than _____ calculations.

Answer 9

PV (Present value)

FV (Future value)

Question 10

What are monetary assets?

Answer 10

include money and claims to receive money (e.g. cash and most receivables)

Question 11

What are monetary liabilities?

Answer 11

obligations to pay amounts of cash (e.g. note payable)

Question 12

Monetary assets and monetary liabilities are valued at the __________.

Answer 12

present value of future cash flows

Question 13

__________ provides a framework for using future cash flows in accounting measurements.

Answer 13

SFAC No. 7 (“Using Cash Flow Information and Present Value in Accounting Measurements”)

Question 14

The key to SFAC No. 7 is determining the present value of future cash flows associated with the asset or liability, taking into account:

Answer 14

1. any uncertainty concerning the amounts

2. timing of the cash flows

Question 15

The company’s __________ is used when applying the expected cash flow approach to the calculation of present value.

Answer 15

credit-adjusted risk-free rate of interest

Question 16

In an __________ cash flows occur at the end of each period.

Answer 16

ordinary annuity

Question 17

In an _________ cash flows occur at the beginning of each period.

Answer 17

annuity due

Question 18

In the future value of an ordinary annuity, the last cash payment will __________.

Answer 18

not earn any interest

Question 19

In the future value of an annuity due, the last cash payment will __________.

Answer 19

earn interest

Question 20

In the present value of an annuity due, __________ needs to be removed from the first cash payment.

Answer 20

no interest

Question 21

What is a deferred annuity?

Answer 21

exists when the first cash flow occurs more than one period after the date the agreement begins

Question 22

Leases requires the recording of a(n) __________ and __________ at the present value of future lease payments.

Answer 22

asset

corresponding liability

Question 23

What is the journal entry at the inception of a lease?

Answer 23

Debit: Leased office building
Credit: Lease payable

Question 24

What is the time value of money?

Answer 24

means that money can be invested today to earn interest and grow to a larger dollar amount in the future.