Chapter 6 - Accounting And The Time Value Of Money Flashcards
What three elements is a fair value estimate based on the valuation model?
- Estimating the amounts and timing of future cash flows
- Developing probability estimates for those cash flows
- Determining the appropriate discount rate to apply to the expected cash flows to arrive at the fair value estimate
What is the time value of money?
A phrase emphasizing the relationship between time and money…a dollar received today is worth more than a dollar promised at some time in the future.
What are notes in the context of present value based accounting measurements?
Valuing no current receivables and payables that carry no stated interest rate or a lower than market interest rate..
What are leases in the context of present value based accounting measurements?
Valuing assets and obligations to be capitalized under long term leases and measuring the amount of the lease payments and annual leasehold amortization
What are the present value based accounting measurements for long term assets?
Evaluating alternative long-term investments by discounting future cash flows. Determining the value of assets acquired under deferred payment contracts. Measuring impairments of assets.
What are the present value based measurement techniques in stock based compensation?
Determining the fair value of employee services in compensatory stock- option plans
What are business combinations in context of present value based accounting measurements?
Determining the value of receivables, payables, liabilities, accruals, and commitments acquired or assumed in a purchase
What are disclosures in the context of time value based accounting measurements?
Measuring the value of future cash flows from oil and gas reserves for disclosure in supplementary information.
What are environmental liabilities in the context of present value based accounting measurements?
Determining the fair value of future obligations for asset retirements
What does the word principal refer to in accounting?
The amount of money borrowed or lent
How do you compute simple interest?
Interest = Principal x Interest x number of periods
How do you compute for the present value
PV= 1 /(1+i) ^n
How do you compute future value
FVF= PV (1 + I) ^n
How do you convert annual interest rate into compounding period interest rate
Divide the annual rate by the number of compounding periods per year
What qualifies as an annuity?
- Periodic Payments or receipts of the same amount
- The same-length interval between such rents
- Compounding of interest once each interval.
What is the future value of an annuity?
The sum of all the rents plus the accumulated compound interest on them.
What is an ordinary annuity?
Rents that occur at the END of the period.
What is an annuity due?
Rents that occur at the beginning of the period.
What is the formula for solving for the future value of an annuity?
(1 + i)^n - 1 / i
What is the formula for computing the present value of an ordinary annuity?
1 - 1 / (1 + i) ^ n / i
How do you compute the present value of deferred annuities?
- Take each periodic rent
- Find present value of an ordinary annuity of 1 for total periods
- Subtract present value of an ordinary annuity of 1 for the number of deferred periods at interest rate
- You multiply the periodic rent by that difference
How do you compute the present value of bonds?
Combine the present value with the present value of the interest payments on bond
How do compute a bond discount?
Bond Interest Expense ( Carrying value of the bond at beginning period x Effective Interest Rate) - ( Face Amount of Bonds x Stated Interest Rate) = Amortization Amount
What is pure rate of interest?
The amount a lender would charge if there were no possibilities of default and no expectation of inflation
What is the expected inflation rate of interest? (0%- ?)
Lenders recognize that in an inflationary economy, they are being paid back with less valuable dollars., As a result they increase their interest rate to compensate for this loss in purchasing power.
What is Credit Risk Rate of Interest (0-5%)
The government has little or no credit risk when it issues bonds. A business enterprise however, depending upon its financial stability, profitability, etc. can have a low or high credit risk.
What is a risk freee rate of return?
The pure rate of return plus the expected inflation rate.
