Session 2 Ch6 and 7 2017.pptx - ACY591I Session 2(Chapter 6 7 Time Value of Money Cash and Receivables Accounting and the Time Value of Money CHAPTER 6

# Session 2 Ch6 and 7 2017.pptx - ACY591I Session 2(Chapter 6...

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ACY591I Session 2 (Chapter 6 & 7) Time Value of Money Cash and Receivables

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6-2 1. Describe the fundamental concepts related to the time value of money. 2. Solve future and present value of 1 problems. 3. Solve future value of ordinary and annuity due problems. 4. Solve present value of ordinary and annuity due problems. 5. Solve present value problems related to deferred annuities, bonds, and expected cash flows. After studying this chapter, you should be able to: Accounting and the Time Value of Money CHAPTER 6 LEARNING OBJECTIVES LEARNING OBJECTIVES
6-3 Basic Time Value Concepts Basic Time Value Concepts A relationship between time and money . A dollar received today is worth more than a dollar promised at some time in the future . Time Value of Money When deciding among investment or borrowing alternatives, it is essential to be able to compare today’s dollar and tomorrow’s dollar on the same footing—to “compare apples to apples.” When deciding among investment or borrowing alternatives, it is essential to be able to compare today’s dollar and tomorrow’s dollar on the same footing—to “compare apples to apples.” LEARNING OBJECTIVE 1 Describe the fundamental concepts r elated to the time value of money.

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6-4 1. Notes 2. Leases 3. Pensions and Other Postretirement Benefits 4. Non-Current Assets Applications of Time Value Concepts: 5. Shared-Based Compensation 6. Business Combinations 7. Disclosures 8. Environmental Liabilities Basic Time Value Concepts
6-5 Payment for the use of money. Excess cash received or repaid over the amount lent or borrowed ( principal ). The Nature of Interest Basic Time Value Concepts Variables in Interest Computation 1. Principal . The amount borrowed or invested. 2. Interest Rate. A percentage of the outstanding principal. 3. Time. The number of years or fractional portion of a year that the principal is outstanding.

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6-6 Interest computed on the principal only. Simple Interest Illustration: Barstow Electric Inc. borrows \$10,000 for 3 years at a simple interest rate of 8% per year. Compute the total interest to be paid for 1 year . Interest = p x i x n = \$10,000 x .08 x 1 = \$800 Annual Interest Basic Time Value Concepts
6-7 Interest computed on the principal only. Simple Interest Illustration: Barstow Electric Inc. borrows \$10,000 for 3 years at a simple interest rate of 8% per year. Compute the total interest to be paid for 3 years . Interest = p x i x n = \$10,000 x .08 x 3 = \$2,400 Total Interest Basic Time Value Concepts

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6-8 Simple Interest Interest = p x i x n = \$10,000 x .08 x 3/12 = \$200 Interest computed on the principal only. Illustration: If Barstow borrows \$10,000 for 3 months at a 8% per year, the interest is computed as follows. Partial Year Basic Time Value Concepts
6-9 Compound Interest Computes interest on principal and interest earned that has not been paid or withdrawn.

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