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Unformatted text preview: Chapter 6: Accounting and the Time Value of Money Whats I mportant Future value of a single sum Present value of a single sum Solving for other unknowns Basic Time Value Concepts SingleSum 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 longterm bonds I n 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??? 1. Notes 2. Leases 3. Pensions and Other Postretirement Benefits 4. LongTerm Assets Accounting Applications 1. Sinking Funds 2. Business Combinations 3. Disclosures 4. I nstallment Contracts 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. I nterest Rate A percentage. 3. Time The number of years or portion of a year that the principal is outstanding. Nature of I nterest Basic Time Value Concepts I nterest computed on the principal only. Simple I nter est I LLUSTRATI ON: 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 I nterest 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 Simple I nter est I LLUSTRATI ON 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 I nterest rate x 7% Annual interest $ 1,400 Partial year x 9/ 12 I nterest for 9 months $ 1,050 PARTI AL PARTI AL YEAR YEAR 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 I nter est I llustration: I llustration: 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. I t National Bank, where it will earn simple interest of 9% per year. I t 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. I n both compound interest of 9% per year compounded annually. I n 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....
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This note was uploaded on 12/29/2009 for the course ACC 5100 taught by Professor Andrews during the Fall '09 term at Wayne State University.
 Fall '09
 Andrews
 Financial Accounting

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