Chapter 6 - Accounting And The Time Value Of Money

Question 1

What three elements is a fair value estimate based on the valuation model?

Answer 1

1. Estimating the amounts and timing of future cash flows
2. Developing probability estimates for those cash flows
3. Determining the appropriate discount rate to apply to the expected cash flows to arrive at the fair value estimate

Question 2

What is the time value of money?

Answer 2

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.

Question 3

What are notes in the context of present value based accounting measurements?

Answer 3

Valuing no current receivables and payables that carry no stated interest rate or a lower than market interest rate..

Question 4

What are leases in the context of present value based accounting measurements?

Answer 4

Valuing assets and obligations to be capitalized under long term leases and measuring the amount of the lease payments and annual leasehold amortization

Question 5

What are the present value based accounting measurements for long term assets?

Answer 5

Evaluating alternative long-term investments by discounting future cash flows. Determining the value of assets acquired under deferred payment contracts. Measuring impairments of assets.

Question 6

What are the present value based measurement techniques in stock based compensation?

Answer 6

Determining the fair value of employee services in compensatory stock- option plans

Question 7

What are business combinations in context of present value based accounting measurements?

Answer 7

Determining the value of receivables, payables, liabilities, accruals, and commitments acquired or assumed in a purchase

Question 8

What are disclosures in the context of time value based accounting measurements?

Answer 8

Measuring the value of future cash flows from oil and gas reserves for disclosure in supplementary information.

Question 9

What are environmental liabilities in the context of present value based accounting measurements?

Answer 9

Determining the fair value of future obligations for asset retirements

Question 10

What does the word principal refer to in accounting?

Answer 10

The amount of money borrowed or lent

Question 11

How do you compute simple interest?

Answer 11

Interest = Principal x Interest x number of periods

Question 12

How do you compute for the present value

Answer 12

PV= 1 /(1+i) ^n

Question 13

How do you compute future value

Answer 13

FVF= PV (1 + I) ^n

Question 14

How do you convert annual interest rate into compounding period interest rate

Answer 14

Divide the annual rate by the number of compounding periods per year

Question 15

What qualifies as an annuity?

Answer 15

1. Periodic Payments or receipts of the same amount
2. The same-length interval between such rents
3. Compounding of interest once each interval.

Question 16

What is the future value of an annuity?

Answer 16

The sum of all the rents plus the accumulated compound interest on them.

Question 17

What is an ordinary annuity?

Answer 17

Rents that occur at the END of the period.

Question 18

What is an annuity due?

Answer 18

Rents that occur at the beginning of the period.

Question 19

What is the formula for solving for the future value of an annuity?

Answer 19

(1 + i)^n - 1 / i

Question 20

What is the formula for computing the present value of an ordinary annuity?

Answer 20

1 - 1 / (1 + i) ^ n / i

Question 21

How do you compute the present value of deferred annuities?

Answer 21

1. Take each periodic rent
2. Find present value of an ordinary annuity of 1 for total periods
3. Subtract present value of an ordinary annuity of 1 for the number of deferred periods at interest rate
4. You multiply the periodic rent by that difference

Question 22

How do you compute the present value of bonds?

Answer 22

Combine the present value with the present value of the interest payments on bond

Question 23

How do compute a bond discount?

Answer 23

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

Question 24

What is pure rate of interest?

Answer 24

The amount a lender would charge if there were no possibilities of default and no expectation of inflation

Question 25

What is the expected inflation rate of interest? (0%- ?)

Answer 25

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.

Question 26

What is Credit Risk Rate of Interest (0-5%)

Answer 26

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.

Question 27

What is a risk freee rate of return?

Answer 27

The pure rate of return plus the expected inflation rate.