{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

510chapter6fall2009bb - C ha pter 6 Accounti ng a nd the T...

Info icon This preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6: Accounting and the Time Value of Money
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
What’s Important Future value of a single sum Present value of a single sum Solving for other unknowns Basic Time Value Concepts Single-Sum Problems Annuities More Complex Situations The nature of interest Simple interest Compound interest Fundamental variables Future value of ordinary annuity Future value of annuity due Present value of ordinary annuity Present value of annuity due Valuation of long-term bonds
Image of page 2
In accounting (and finance), the term indicates that a dollar received today is worth more than a dollar promised at some time in the future. Basic Time Value Concepts Time Value of Money MONEY NOW ??? MONEY LATER???
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1. Notes 2. Leases 3. Pensions and Other Postretirement Benefits 4. Long-Term Assets Accounting Applications 1. Sinking Funds 2. Business Combinations 3. Disclosures 4. Installment Contracts
Image of page 4
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. 2. Interest Rate - A percentage. 3. Time - The number of years or portion of a year that the principal is outstanding. Nature of Interest Basic Time Value Concepts
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Interest computed on the principal only. Simple I nterest ILLUSTRATION: On January 2, 2010, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the annual interest cost. Principal $20,000 Interest rate x 7% Annual interest $ 1,400 Federal law requires the disclosure of interest rates on an annual basis in all contracts. FULL FULL YEAR YEAR
Image of page 6
Simple I nterest ILLUSTRATION continued: On March 31, 2010, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the interest cost for the year ending December 31, 2010. Principal $20,000 Interest rate x 7% Annual interest $ 1,400 Partial year x 9/ 12 Interest for 9 months $ 1,050 PARTIAL PARTIAL YEAR YEAR
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Computes interest on the principal and on interest earned to date (assuming interest is left on deposit). Compound interest is the typical interest computation applied in business situations. Compound Interest
Image of page 8
Illustration: Illustration: Tomalczyk Company deposits $10,000 in the Last Tomalczyk Company deposits $10,000 in the Last National Bank, where it will earn simple interest of 9% per year. It National Bank, where it will earn simple interest of 9% per year. It deposits another $10,000 in the First State Bank, where it will earn deposits another $10,000 in the First State Bank, where it will earn compound interest of 9% per year compounded annually. In both compound interest of 9% per year compounded annually. In both cases, Vasquez will not withdraw any interest until 3 years from the cases, Vasquez will not withdraw any interest until 3 years from the date of deposit. date of deposit. Year 1 $10,000.00 x 9% Year 1 $10,000.00 x 9% $ 900.00 $ 10,900.00 Year 2 $10,900.00 x 9% Year 2 $10,900.00 x 9% $ 981.00 $ 981.00 $ 11,881.00 $ 11,881.00 Year 3 $11,881.00 x 9% Year 3 $11,881.00 x 9% $1,069.29 $1,069.29 $ 12,950.29 Basic Time Value Concepts Basic Time Value Concepts
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Compound I nterest Tables Table 1 - Future Value of 1 Table 2 - Present Value 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 Five Tables in Chapter 6
Image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern