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
Longterm assets
z
Sinking funds
z
Business combinations
z
Disclosures of oil and gas reserves
z
Installment contracts
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document