Chapter 06 - Slides_1

# Chapter 06 - Slides_1 - Accounting and the Time Value of...

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Accounting and the Time Value of Money Professor Dennis Chambers ACC 301 5/2/2007 ACC 301 2 Chapter 6 Objectives | Identify accounting topics where time value of money is relevant | Distinguish between simple and compound interest | Learn how to use appropriate compound interest tables | Identify variables fundamental to solving interest problems | Solve simple future and present value problems | Solve future value of ordinary and annuity due problems | Solve present value of ordinary and annuity due problems | Solve present value problems where the cash flows are irregular or complex 5/2/2007 ACC 301 3 Time Value of Money | Basic Principle: z Money available today is worth more than money available sometime in the future z Present Value calculations convert dollars to be received or paid in the future into the equivalent dollars today z Future Value calculations convert dollars paid or received today into their equivalent at some point in the future | Why do we care about this? z Suppose you win the lottery…Should you take a reduced lump sum today or take the entire amount paid over the next 20 years? Present values allow you to make that decision 5/2/2007 ACC 301 4 Time Value Calculations in Accounting | Present value is being used more and more in accounting z New concepts statement devoted to use of present values | Examples of present values in accounting z Notes—calculation of historical cost based on present values z Leases z Pensions—future value of pension assets and obligations z Long-term assets z Sinking funds z Business combinations z Disclosures of oil and gas reserves z Installment contracts

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