Chapter 6: Accounting and the Time Value of Money

Question 1

Present Value Factor

Answer 1

PVF of n, i = 1 / (1+i)^n

i= interest rate per period
n= number of compounding periods

Question 2

Effective Rate

Answer 2

= (1+i)^n - 1

i = interest rate PER PERIOD
n= number of periods

Question 3

Future value of an ordinary annuity

Answer 3

where:
n= number of compounding periods
i = interest rate for compounding period

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

Future value of an ordinary annuity also = R (periodic rent)

Question 4

Compounding periods, ordinary annuity

Answer 4

Number of compounding periods = number of rents minus one

Question 5

Ordinary annuity vs annuity due

Answer 5

Ordinary = rents due at the END of each period

Rents earn no interest in the period in which they are deposited

Annuity Due = rents occur at the beginning of each period

Question 6

Future value of 1 table

Answer 6

Amounts to which $1 will accumulate if deposited now at a specified rate, left for a specified number of periods

Question 7

Annuity

Answer 7

Periodic payments (rents) of the same amount made at equal intervals compounding interest once each interval

Question 8

Future value factor

Answer 8

where:
i = rate of interest for a single period
n = number of periods

FvFn,i = (1+i)^n

periods = years x compounding periods per year

Question 9

Computing present value

Answer 9

When future value is known

Discount all cash flows from future to present PV < Future Value

Present Value = Future value x PVFn,i

PVFn,i = present value factor for n periods at i interest

Question 10

Computing Future Value

Answer 10

When present value is known

Must accumulate all cash flows to a future point (FV > PV)

Future value = present value x FVFn,i

FVFn,i = Future value factor for n periods at i rate

Question 11

Discounting

Answer 11

Opposite of accumulation: removing accumulated interest

Question 12

Future Value

Answer 12

Value at a future date of a given sum or sums invested assuming compound interest

Question 13

Number of Periods

Answer 13

Total number of compounding interest

Question 14

Rate of interest

Answer 14

Annual interest rate adjusted to reflect the length of a compounding period (if period is less than a year)

Question 15

Time Value of Money

Answer 15

A dollar receiving today is worth more than a dollar promised in the future due to the potential investment returns on that dollar

Question 16

Present Value

Answer 16

Per moneychimp: the amount of money one would need to invest today in order to have a specified balance in the future

per book: the value now of a future sum or sums discounted assuming compounding interest

Question 17

Present Value techniques

Answer 17

Use to convert expected cash flows into present value as an estimate of fair value

Question 18

Present value based accounting measurements

Answer 18

Notes - noncurrent with no stated interest or lower than market
Leases
Pensions/ retirement benefits
long term assets
stock-based compensation
business combinations
disclosures
environmental liabilities

Question 19

Present value of an annuity due of $1 table

Answer 19

The amounts that must be deposited now at a specified rate of interest to permit withdrawals of $1 at the BEGINNING of regular periodic intervals for the specified number of periods

Question 20

Present Value of an ordinary annuity of $1 table

Answer 20

Contains the amounts that must be deposited now at a specified rate of interest to permit withdrawals of $1 at the END of regular intervals for the specified number of periods

Question 21

Future Value of an ordinary annuity of $1 table

Answer 21

Rents = payments

Contains the amounts to which periodic rents (will accumulate?) if the rents are invested at the END of each period at a specified rate of interest for a specified number of periods

Question 22

Present Value of $1 table

Answer 22

Contains the amounts that must be deposited now at a specified rate of interest to equal $1 at the end of a specified number of periods

Question 23

Effective Yield

Answer 23

Total yield received when the interest payments are reinvested at the same rate as the principal

Question 24

Simple Interest

Answer 24

= principal x rate x number of periods

rate must be the rate for a single period, whatever it is - need to adjust annual interest rate

Question 25

Converting annual interest rate to compounding interest rate

Answer 25

Annual rate / number of compounding periods in a year

Question 26

Future Value

Answer 26

Value at a later date of a single sum that is invested at compound interest

Question 27

Preset value

Answer 27

Value at an earlier date (usually now) of a given future some discounted at compound interest

Question 28

Pure rate of interest

Answer 28

Amount a lender would charge if there were no possibilities of default and no expectations of inflation