Class9 Notes

# Class9 Notes - Chapter 6 Accounting and the Time Value of...

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Chapter 6: Accounting and the the Time Value of Money Time Value of Money SYRACUSE UNIVERSITY Whitman School of Management Chapter 6-1 Professor Hong Xie ACC 356/601 n accounting (and finance) the term indicates Basic Time Value Concepts Time Value of Money In accounting (and finance), the term indicates that a dollar received today is worth more than a dollar to be received at some time in the future. The concept of time value of money is widely used in accounting. You need to master the Chapter 6-2 LO 1 Identify accounting topics where the time value of money is relevant. concept and the techniques well. ayment for the use of money Nature of Interest Payment for the use of money. Excess cash received or repaid over the amount borrowed (principal). Variables involved in financing transaction: 1. Principal - Amount borrowed or invested. Chapter 6-3 2. Interest Rate -A±percentage 3. Time - The number of years or portion of a year that the principal is outstanding. Computes interest on he principal and Compound Interest ¾ the principal and ¾ on interest earned to date (assuming interest is left on deposit). Compound interest is the typical interest computation applied in business situations. Chapter 6-4 LO 2 Distinguish between simple and compound interest.

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ILLUSTRATION: On January 2, 2007, Tomalczyk borrows \$20,000 for 3 Compound Interest years at a rate of 7% per year. Calculate the total interest cost for all three years, assuming interest is compounded annually. Compound Interest Accumulated Date Calculation Interest Balance an 2007 0 000 Chapter 6-5 LO 2 Distinguish between simple and compound interest. Jan. 2007 20,000 \$ 2007 \$20,000 x 7% 1,400 \$ 21,400 2008 \$21,400 x 7% 1,498 22,898 2009 \$22,898 x 7% 1,603 24,501 4,501 \$ Compound Interest Tables Table 1 - Future Value of \$1 Five Tables in Chapter 6 Table 2 -Present Va lue of \$1 Table 3 - Future Value of an Ordinary Annuity of \$1 Table 4 - Present Value of an Ordinary Annuity of \$1 Table 5 - Present Value of an Annuity Due of \$1 Chapter 6-6 LO 3 Use appropriate compound interest tables. Number of Periods = number of years x the number of compounding periods per year. Compounding Period Interest Rate = annual rate/the number of compounding periods per year. Compounding can substantially affect the rate of return. A 9% annual interest compounded daily provides a 9.42% yield. How compounding affects Effective Yield for a \$10,000 investment. Illustration 6 Illustration 6-5 Chapter 6-7 ate of Interest Variables Fundamental to Compound Interest Rate of Interest Number of Time Periods Present Value Future Value Illustration 6 Illustration 6-6 Chapter 6-8 LO 4 Identify variables fundamental to solving interest problems.
Single Single-Sum Problems Sum Problems Generally Classified into Two Categories Unknown Future Value Unknown Present Value Chapter 6-9 LO 5 Solve future and present value of 1 problems.

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Class9 Notes - Chapter 6 Accounting and the Time Value of...

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