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Unformatted text preview: MAIN IDEAS IN CH 6 HANDOUT ACCOUNTING AND THE TIME VALUE OF MONEY (NOTE: Handouts are not a substitute for reading and studying the text. Handouts do not cover everything that you need to know.) The main ideas you should learn from CH 6 include all of the stated learning objectives, the following: LO1: Identify accounting topics where the time value of money is relevant. LO2: Distinguish between simple and compound interest. LO3: Use appropriate compound interest tables (we will use tables and not financial formulas or calculators). LO4: Identify variables fundamental to solving interest problems. LO5: Solve future and present value of 1 problems. LO6: Solve future value of ordinary and annuity due problems. LO7: Solve present value of ordinary and annuity due problems. LO8: Solve present value problems related to deferred annuities and bonds. LO9: Apply expected cash flows to present value measurement. INTRODUCTION Consider the following scenarios. ANNA: On January 1 of each year for 12 years (from age 21 to age 33), ANNA deposited $5,000 into her savings account which earned 5%. She started this savings plan as soon as she started to work after graduating from WINTHROP. ANNA left the money in the account until age 65, when she planned to retire. How much money do you think she had at retirement? SHAWN: SHAWN and ANNA graduated from WINTHROP at the same time and went to work at the same time, making about the same salary. However, SHAWN decided it was more prudent to get established and then start saving. Thus, he started putting $5,000 away in a savings account when he turned 34 and kept doing so until age 65, when he also planned to retire. He also earned 5% on the savings account and left the money in the account until age 65, when he planned to retire. How much money do you think SHAWN had at retirement? ANNAS savings at age 65? SHAWNS savings at age 65? Difference! The great part about this chapter is that it will increase your personal financial literacy. You will gain a better understanding of how interest compounds and how interest rates are a product of the time over which money is borrowed (or invested). This will be helpful in appreciating the importance of saving early and why the commonly heard phrase, TIME IS MONEY is true as illustrated in ANNA and SHAWNS example above. Few of us are fortunate to have a big windfall in our lifetime, so saving wisely and understanding the cost of borrowing or the benefits of investing can help you toward a financially secure future. MAIN IDEAS IN CH 6 HANDOUT 1...
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- Spring '10